November 19, 2004

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Report No. 30381-PK
Pakistan
Rural Factor Markets
Policy Reforms for Growth and Equity
Rural Development Unit
South Asia Region
11
RURAL FACTOR MARKETS IN PAKISTAN:
Policy Reforms for Growth and Equity
TABLE OF CONTENTS
..
Pakistan at a Glance ............................................................................................................vu
Acknowledgements .............................................................................................................. i x
Executive Summary ............................................................................................................. x
I .
I 1 .
I11 .
I V .
V .
VI .
Introduction .............................................................................................................. 1
Plan of the Report ....................................................... 1. .................................................. 3
Agricultural Policy And Sector Performance in Pakistan: An Overview .......... 4
Agricultural Markets and Prices .......................................................................... 6
Rural Land Markets: Institutions and Constraints .............................................. 10
Land Ownership and Uti l i zati on .......................................................................... 10
Land Distribution, Land Pol i cy and Land Reform .............................................. 14
Land Reforms ...................................................................................................... -14
Land Administration, Land Titles and Contract Enforcement ............................. 16
Patterns o f Land Use and Productivity by Farm Size and Tenure Status ............ 19
Water Markets I n Pakistan Agriculture ................................................................ 24
Water Avai l abi l i ty in Pakistan Agriculture .......................................................... 24
Access t o Water and Agricultural Productivity ................................................... 27
Implications for Agricultural Productivity ........................................................... 30
Groundwater ........................................................................................................ 29
Laws and Regulatory Framework for Water ....................................................... 31
Rural Labor Markets .............................................................................................. 33
Structure o f Labor Use ......................................................................................... 33
Sectoral Composition o f Labor Use ..................................................................... 35
Trends in Wages .................................................................................................. 36
Labor Mobi l i t y and Mi grat i on ............................................................................. 38
Gender Issues ....................................................................................................... 38
Chi l d Labor .......................................................................................................... 40
Bonded Labor ....................................................................................................... 42
Government Labor Policies ................................................................................. 43
Rural Credit Markets .............................................................................................. 46
Structure o f Rural Credit Markets ........................................................................ 46
Historical Trends .................................................................................................. 47
Repayment o f Loans ............................................................................................ 50
Structure o f Interest Rates .................................................................................... 50
. . .
111
Formal Sector Credit and Mechanization ............................................................ 51
Farmer Household Access to Credit ................................................................... 52
Access t o Credit ................................................................................................... 54
Micro-credit Programs and Savings Mobi l i zati on ............................................... 54
Implications o f Credit Constraints for Productivity and Income ......................... 59
VI1 . Implications For Income Distribution And Poverty Reduction .......................... 60
The Puzzle o f Persistent Rural Poverty and High Agricultural Growt h .............. 60
Agricultural Growth and Rural Income Distribution ........................................... 65
Factor Market Reforms ........................................................................................ 68
Implications f or Growth and Poverty Reduction ................................................. 69
.....................................................................
VI11 . Conclusions And Policy Implications 70
Land ..................................................................................................................... 70
Water .................................................................................................................... 75
Labor .................................................................................................................... 79
Credit .................................................................................................................... 81
Implications for Rural Poverty Reduction ........................................................... 84
Conclusions .......................................................................................................... 85
Table 1.1,
Table 2.1.
Table 2.2.
Table 2.3
Table 2.4.
Table 3.1.
Table 3.2.
Table 3.3
Table 3 .4 .
Table 3.5.
Table 3.6.
Table 4.1.
Table 4.2.
Table 5.1.
Table 5.2.
Table 5.3.
Table 5.4.
Table 5.5.
Table 5.6.
Table 6.1.
Table 6.2.
Table 6.3.
Table 6.4.
Table 6.5.
Table 6.6.
LIST OF TABLES
Poverty Estimates for Pakistan ................................................................................. 1
Agri cul tural Gr owt h in Pakistan. 1959-60 t o 2001-02 ............................................. 4
Area. Yi el d and Production o f Maj or Crops in Palustan. 1999-00 t o 2002-03 ........ 5
Rati o o f Wholesale Prices (Lahore) to Support Prices. 1995-96 t o 200 1 -02 .......... 7
Subsidies in Palustan Agriculture: 1996-97 to 1999-00 (mn Rs.) ........................... 9
Land Use in Pakistan. 1990-91 and 2000-01 ............................................................ 10
Pakistan: Di stri buti on o f Land Ownership .............................................................. 11
Share o f different crops in total cropped area by size o f farm (1990 and 2000) ...... 21
Gini Coefficient for Ownership Hol di ngs by Province ............................................ 11
Pakistan: Di stri buti on o f Farms and Area by Far m Size (operated area) ................ 13
Recent Findings on Land Producti vi ty and Land Markets ....................................... 23
Average Water Balance o f the Indus Ri ver System ................................................. 25
Gross Revenue. Total Cost and Returns t o Irri gati on o f Maj or Crops in
Pakistan Rural Labor Force. 1998 (thousands) ........................................................ 34
Labor Force Participation, Unempl oyment and Underemployment Rates ............... 34
Percentage Di stri buti on o f Rur al Empl oyed Persons by Maj or Sectors and
Provinces (1999-00) .............................................................................................. 35
Gr owt h in Real Wage Rates in Palustan, 1984-2002 ............................................... 36
Female Labor Force Participation and Unempl oyment in Pahstan, 1999-2000 ...... 39
Sources o f Credit in Palustan, 1995-96 .................................................................... 47
Zarai Taraqiati Bank Ltd . (ADBP) Lending, 2002-03 ............................................. 49
Palustan: Interest Rates in Rur al Credi t Markets by Source .................................... 51
Outstanding Loans by Tenure Categories (Formal and Informal ) ........................... 53
Average Size o f Loans t o Far m Households, 2002-03 ............................................. 53
Various Regions of Pakistan 2002-2003 ............................................................... 31
Underemployment Rates by Occupation (1999-00) ................................................. 35
Formal Sector Banki ng (bn 2000-01 Rupees) .......................................................... 46
i v
Table 6.7.
Table 6.8.
Table 7.1.
Table 7.2.
Table 7.3.
Table 7.4.
Table 7.5.
Table 7.6.
Table 8.1.
Table 8.2.
Table 8.3
Figure 2.1.
Figure 2.2.
Figure 3.1.
Figure 3.2.
Figure 4.1.
Figure 5.1.
Figure 5.2
Figure 5.3.
Figure 6.1.
Figure 6.2.
Figure 6.3.
Figure 6.4.
Figure 6.5.
Figure 7.1.
Figure 7.2.
Figure 7.3.
Box 3.1
Box 3.2.
Box 3.3.
Box 3.4.
Box 4.1.
Box 4.2.
Box 5.1.
Box 5.2.
Box 6.1.
Box 6.2.
Box 6.3.
Box 7.1.
Box 8.1
Box 8.2.
Credit Rationing in Rural Pakistan 200 1 .................................................................. 55
Maj or Micro-credit Programs in Pakistan, 2003 ...................................................... 55
Real Prices of Maj or Food Grains in Pakistan, 1970-2003 ...................................... 61
Rural Household Income by Source and Expenditure Quintile (200 1-02) ............... 63
Palustan Rural Agricultural Incomes ........................................................................ 65
Implications of Changes in Economic Structure for Agricultural Multiplier
Effects .................................................................................................................... 67
Simulated Distributional Impact o f Factor Market Reforms .................................... 68
Characteristics o f Factor Markets in Palustan .......................................................... 71
Maj or Linkages o f Key Factor Market Distortions .................................................. 72
Palustan Rural Factor Markets: Current Government Policies and Programs
and Possible Reforms ............................................................................................ 86
Rural Poverty Across Household Groups, 2002-2002 ............................................. 62
LIST OF FIGURES
Wheat Prices in Palustan, 1995-2003 .................................................................... 7
Nomi nal Rates o f Protection o f Maj or Crops ........................................................ 8
Pakistan: Percentage o f Farms and Area Cultivated by Land Tenure Status ....... 13
Pakistan: Farm Income per Cultivated Area in Punjab, 2000/01 ......................... 20
Area Irrigated by Source o f Irrigation, Palustan 1982-2002 ................................. 25
Real Wages in Palustan: 1984-2002 ..................................................................... 37
Chi l d Labor in Pakistan, 1999-2000 ..................................................................... 40
Chi l d Labor Force Participation Rates by Province, Palustan 1999-2000 ............ 41
Growth o f Institutional Agricultural Credit (mn 2000-01 Rps.) ........................... 49
ADBP/ZTBL Tractor Loans land Domestic Tractor Production,
Formal and Informal Credit by Tenure Categories, 200 1-02 ................................ 53
Credit Rationing in the Formal Market ................................................................. 56
Credit Rationing in the Informal Market ............................................................... 56
Real Prices of Maj or Food Grains in Pakistan, 1970-2003 ................................... 61
Rural Household Income Sources by Quintile, Palustan, 2001-02 ....................... 63
Palustan: Per Capita Incomes and Expenditures 2001-02 .................................... 64
1986-87 - 2002103 ............................................................................................. 52
List of Text Boxes
Land Pri ce Determi nati on in Pakistan: Land Rents and Asset Effects ...... 12
Historical Rural Land Tenure Systems in Pakistan' ............................................. 15
Land Policies and Land Reform in Palustan ......................................................... 16
Land Rights in Punjab and Sindh .......................................................................... 18
The Indus Basin Irrigation System ........................................................................ 26
Administrative Reforms in Canal Water Management ......................................... 28
Chi l d Labor in Rural Palustan ............................................................................... 41
Bonded Labor in Pakistan ..................................................................................... 42
Recent Reforms in Formal Sector Agricultural Lending in Palustan .................... 48
Pakistan Poverty Alleviation Fund (PPAF)' .......................................................... 57
Aga Khan Rural Support Programme (AKRSP) ................................................... 58
Agricultural Growth and Rural Poverty ................................................................ 66
Improving the Enforcement o f Contracts in Land Administration in
Palustan .............................................................................................................. 73
Examples o f Land Reform and Land Titling Projects ........................................... 74
V
Box 8.3.
Box 8.4.
Box 8.5.
Box 8.6.
Box 8.7.
Box 8.8
Box 8.9
Important Issues Regarding Tradable Water Rights ............................................. 77
Infrastructure Constraints for Development o f Water markets in Pakistan .......... 78
Factor Market Reforms and Agri cul tural Di versi fi cati on in Chi l e ....................... 79
Factor Market Reforms and Labor Mobi l i t y in Poland ......................................... 80
Bonded Labor and Reforms in Nepal .................................................................... 81
Mi cro-Fi nance for Agriculture .............................................................................. 83
Acti vi ti es ............................................................................................................ 84
Suggested Guidelines for Provi di ng Matchi ng Grants for Income-generating
ANNEXES
Annex 1 : Credit Access and Agricultural Productivity .................................................... 88
Annex 2: Determinants of Farm Revenue Income in Pakistan -Revenue
Functions for Pakistani Farm Households ....................................................... 98
Econometric Specification .............................................................................................. 101
Human Capi tal ................................................................................................................ 102
Mai n Findings ................................................................................................................. 102
Far m Operation Size ....................................................................................................... 105
Land Ownership .............................................................................................................. 106
Fami l y Size ..................................................................................................................... 107
Surface Water ................................................................................................................. 108
Credit .............................................................................................................................. 109
Other Results ................................................................................................................... 111
The Effects o f Tenancy Type .......................................................................................... 111
Annex 3: Distributional Impacts of Agricultural Growth and Factor Market
Reforms ................................................................................................................. 113
The 2001-02 Pakistan S A M ............................................................................................ 113
Model i ng Framework ...................................................................................................... 118
Simulation 1 : Output Shocks to Crop and Li vestock Agri cul ture ................................. 120
Simulation 2: Shi ft f r om Share-Cropping t o Fi xed Rents ........................................... 122
Simulation 3 : Removal o f Credit Constraints ................................................................ 124
Simulation 4: Improved Di stri buti on o f Water .............................................................. 127
Conclusion ...................................................................................................................... 129
Table A1 . 1
Table Al . 2
Table Al . 3
Table Al.4
Table Al . 5
Table Al . 6
Table A2.1
Table A2.2
Table A2.3
Table A2.4
Li s t o f Variables and Descriptive Statistics .......................................................... 89
Probi t on Access to Formal Credit ........................................................................ 91
Probi t on Access to Informal Credit ...................................................................... 92
Probi t on Access to Formal and I nf or mal Credi t .................................................. 93
Credi t Access and Far m Producti vi ty ................................................................... 94
Credi t Access and Far m Producti vi ty (IV Estimates) ........................................... 96
Canal Water Usage and Transactions by District., ............................................... -99
Net Far m Revenue Regression Results (Dependent Variable: Net Far m
Elasticities o f Household Far m Revenue with Respect t o Quasi-fixed
The Di stri buti on o f Far m Size and Land Ownership (Acres) ............................... 100
Revenue (Rs) ....................................................................................................... 103
Factors ................................................................................................................ 105
v1
Table A2.5
Table A3.1
Table A3.2
Table A3.3
Table A3.4
Table A3.5
Table A3.6
Table A3.7
Table A3.8.
Table A3.9
Table A3.10
Table A3.11
Table A3.12
Fi gure Al a 1
Fi gure Al . 2.
Fi gure Al.3
Bo x A3.1
Return on Credit (Elasticities) ............................................................................... 110
Pakistan: Household Incomes and Expenditures, 2001/02 .................................. 116
Pakistan: Factor Income Shares by Household Type 2001/02 ............................. 117
Disaggregated Factor Incomes Shares by Household Group, Pakistan
2001/02 ............................................................................................................... 117
Pakistan Rural Agri cul tural Incomes .................................................................... 118
Simulation Results: 10 Percent Output Shock to Maj or Crops and
Livestock.. .......................................................................................................... 121
Share o f Household Group Ar e Cultivated by Tenure Status, 2001/02 ................ 123
Share o f Area Cultivated by Tenure Status and Household Group
2001/02 ............................................................................................................... 123
Si mul ati on Results: Percentage Change in Household Incomes.. ........................ 124
Estimates o f Producti vi ty Gains f r om Removal o f Credit Constraints ................. 125
Di stri buti on o f Estimated Returns to Small Far m Irri gated Land (Maj or
Crops), 2001/02 .................................................................................................. 126
Crop Yi el ds by Locati on Al ong Canals (tons/hectare) ......................................... 127
Simulation Results: Household Incomes .............................................................. 128
Figures in Annexes
Credit Rati oni ng in the Formal Mar ket ................................................................. 89
Credit Rati oni ng in the Informal Mar ket ............................................................... 90
Operated vs . Owned Area by Province ................................................................. 97
Box in Annex
Structure of t he 2001-02 Pakistan S A M ............................................................... 114
References ............................................................................................................................. 130
Background Papers for the Pakistan Rur al Factor Mar ket Study ................................. 137
vii
1983 1993 2002 2003
30.3 25.0 23.2 23.3
Pakistan at a glance 9117/04
Growth of investment and GDP (%)
" T I
POVERN and SOCIAL
Pakistan
2003
Population, mid-year (millions)
GNI per capita (Atlas method, US$)
GNI (Atlas method, US$ billions)
Average annual growth, 1997-03
Population (%)
Labor force (%)
Most recent estimate (latest year available, 1997-03)
Poverty (% ofpopulation below national poverty line)
Urban population (% of total population)
Life expectancy at birth (years)
Infant mortality (per 7,000 live births)
Child malnutrition (% of children under 5)
Access to an improved water source (% ofpopulation)
illiteracy (% of population age 75+J
Gross primary enrollment (% of school-age population)
Male
Female
KEY ECONOMIC RATIOS and LONG-TERM TRENDS
1983
GDP (US$ billions) 28.7
Gross domestic investmenffGDP 18.8
Exports of goods and servicesiGDP 11.9
Gross domestic savingsiGDP 7.7
Gross national savings/GDP 17.0
Current account balance/GDP 0. 6
Total debffGDP 41.9
Total debt serviceiexports 20.9
Present value of debffGDP
Present value of debffexports
Interest paymentsiGDP 1.1
1983-93 1993-03
(average annual growth)
GDP 5.8 3.4
GDP per capita 3.1 0.9
Exports of goods and services 10.4 3.3
148.4
430
64.0
2.4
3.2
33
34
64
76
90
59
73
84
62
1993
51.5
20.8
16.3
14.7
20.6
5 . 5
1.5
47.7
23.9
2002
2.8
0.4
10.3
South
Asia
1,425
510
726
1.8
2.3
28
63
68
48
84
41
95
103
88
2002
58.9
14.7
18.7
14.4
18.1
2.7
1.3
57.1
21.0
44.9
195.2
2003
5.8
3.3
32.9
Low-
income
2,310
450
1,038
1.9
2.3
30
58
82
44
75
39
92
99
85
2003
68.6
15.5
20.5
15.6
22.2
6.1
1.1
52.7
16.7
200347
6.1
3.7
1.5
levelopment diamond'
Life expectancy
T
;NI
i er
:apita
I
Access to improved water source
Pakistan
Low-income group
-
Economic ratlos'
Trade
T
indebtedness
Pakistan
Low-income (ITOUR
-*
STRUCTURE of the ECONOMY
(% of GDPJ
Agriculture
Industry
Services
Manufacturing
I
221 247 233 235 lo
153 167 161 164 ~ o
477 503 535 532 .,o
Private consumption 80.8 72.2 74.4 72.7 - n o 1
General government consumption 11.4 13.1 11.3 11.7
imports of goods and services 23.0 22.4 19.0 20.4 I
-GDI +GDP
(average annual growth)
Agriculture
lndiistrv
Manufacturing
Services
Private consumption
General government consumption
Gross domestic investment
Imports of goods and services
1983-93 199343 2002 2003
4.4 3.5 -0.1 4.1
7.1 3.6 5.4 5.4
6.6 4.1 5.0
5.7 4.1 4.1
I
4.3
6.6
3.5
1.3
1.4
13.5
-0.6
10.4
4.9 0.7 -3.0 10.5 -Exports -imports
3.2 0.0 4.5 13.9
Note: 2003 data are preliminary estimates.
* The diamonds show four key indicators In the country (in bold) compared with its income-group average. If data are missing, the diamond will
be incomplete.
viii
PRICES and GOVERNMENT FINANCE
Domestic pri ces
(% change)
Consumer prices
Implicit GDP deflator
Government finance
(% of GDP, includes current grants)
Current revenue
Current budget balance
Overall surplusldeflcit
TRADE
(US$ miilions)
Total exports (fob)
cotton
Rice
Manufactures
Total imports (ci0
Food
Fuel and energy
Capital goods
Export price index (1995=100)
Import price index (1995-100)
Terms of trade (1995=100J
BALANCE of PAYMENTS
(US$ millions)
Exports of goods and services
Imports of goods and services
Resource balance
Net income
Net current transfers
Current account balance
Financing items (net)
Changes In net reserves
Memo:
Reserves including gold (US$ millionsJ
Conversion rate (DEC, local/US$)
EXTERNAL DEBT and RESOURCE FLOWS
(US$ millions)
Total debt outstanding and disbursed
IBRD
IDA
Total debt sewice
IBRD
IDA
Composition of net resource flows
Official grants
Official creditors
Private creditors
Foreign direct investment
Portfolio equity
World Bank program
Commitments
Disbursements
Principal repayments
Net flows
Interest payments
Net transfers
1983 1993
.. 9.8
5.3 8.7
.. 18.1
.. -2.4
.. -8.1
1983 1993
2,694 6,782
.. 271
.. 317
1,881 3,723
.. 10,049
.. 1,290
.. 1,578
.. 3,409
88
96
92
1983 1993
3,420 8,339
6,593 12,856
-3,173 -4,517
-421 -1,498
3,416 2,688
-178 -3,326
.. 2,682
.. 644
2,758 1,369
12.7 25.9
1983 1993
12,026 24,546
351 2,624
1,145 2,683
1,343 2,383
63 343
14 45
277 361
350 1,011
-87 710
30 306
0 270
306 625
144 598
34 182
110 416
42 206
68 210
2002
2.7
3.1
19.5
0.2
-6.7
2002
9,140
18
448
5,368
9,432
413
2,664
2,594
80
90
89
2002
11,056
11,646
-590
-2,319
4,500
1,591
1,685
-3,276
4,997
61.6
2002
33,672
2,749
5,394
2,850
367
111
1,495
78 1
-515
368
-491
736
961
318
643
160
483
2003
3.1
4.6
20.8
1.1
4 . 5
2003
10,889
49
555
6,653
11,333
587
3,097
3,392
89
101
88
2003
13,686
14,047
-361
-2,210
6,775
4,204
1,475
-5,679
10,243
58.6
2003
36,132
2,695
5,869
3,028
373
130
1,038
-1 33
-530
612
-394
498
145
357
-21 2
147
-358
Inflation (Oh)
I
1 I
Export and Import levels (US$ mill.)
12,500 I
10 000
7 500
5 000
2 500
0
1 O3 I
97 98 99 00 01 02
Exports imports
1 ; ; n t account balance to GDP (%)
1-10 1
Composition of 2003 debt (US$ mill.)
G: 1.245 A 2,695
F 2,265
E 14342
A - iBRD E. Bilateral
B - IDA D. Other multilaterai F - Private
C - IMF G * Short-term
DeveloDment Economics 9117104
i x
ACKNOWLEDGEMENTS
This study was managed by Sakwa Bunyasi and Paul Dorosh, (co-task managers). Paul Dorosh i s the
pri nci pal author o f the fi nal report. Albert0 Valdes designed the study, provi ded overall guidance for the
wor k and contributed t o the analysis and synthesis. Sohail J. Mal i k pl ayed a maj or r ol e in the wor k on
agricultural credit and poverty, the synthesis of the results, and in organizing seminars and workshops in
Palustan.
The report draws f r om a set o f background papers prepared for this study listed at the end o f this report.
Gustavo Anriquez, Hanan Jacoby, Ghazala Mansuri, Hi na Nazl i , Muhammad Khan Ni azi and Sarfraz
Qureshi made maj or contributions, bot h as authors o f background papers, and in the synt hesi s o f the
results. Background papers were also prepared by Munir Ahmad, Zafar Al taf, Alejandra Cox-Edwards,
Zaki r Hussain and A.R. Kemal . Manuel Conti j och contributed to the discussion o f i rri gati on and water
markets .
Adol f o Bri zzi , Derek Byerlee, Tekol a Dejene, Rashid Faruqee, Steven Haggblade, Abed Hasan, Isabel
Lavadenz, John Mel l or, Stephen Mink, Abdul Salaam and Di na Umal i -Dei ni nger provi ded useful
comments and suggestions on various aspects o f the report. The report has also benefited f r om comments
from the Pakistan Ministry o f Food, Agriculture and Li vestock (MINFAL) and discussions with
participants at seminars at the Agri cul tural Prices Commission, the Lahore Uni versi ty o f Management
Sciences, the Pakistan Institute o f Development Economics and the International Water Management
Institute in Lahore, and a seminar in September 2004 in Islamabad hosted by MINFAL.
X
EXECUTIVE SUMMARY
Introduction
1.
and trade and output pri ci ng reforms have spurred substantial agricultural growth over the last three
decades. Agri cul tural GDP growth slowed substantially since the early 1990s, particularly in the crop
sector (2.4 percent average annual growth f r om 1990 to 2002, compared with 3.5 percent per year growth
from 1960 t o 2002), however, raising concerns about the sustainability o f agricultural growth in the
medi um term. Moreover, the sharp declines in rural poverty that accompanied agricultural growth in the
1970s and 1980s have not continued. The latest available poverty estimates (38.9 percent in 2001-02),
may be inflated by the effects o f the drought, but estimated rural poverty in 1998-99 (35.9 percent) i s
essentially the same as in 1990-91 (36.9 percent).
In Pakistan, publ i c and private investments in irrigation, adoption o f green revol uti on technology
2.
a central r ol e t o the rural sector in accelerating growth and reducing rural poverty. However, although the
PRSP places a maj or emphasis on employment-generating growth in agriculture, small and medi um
enterprises, housi ng and construction, i nformati on technology, telecommunications and exports, i t lacks
an expl i ci t rural development strategy beyond that for the agricultural sector. Accelerating r ur al
economic growth and reducing rural poverty i s complex, and requires a comprehensive strategy built on
sound analysis covering al l maj or aspects o f the rural economy i ncl udi ng agricultural output markets,
input markets (seeds, fertilizer, extension), factor markets (land, water, labor and credit), the r ur al non-
f ar m economy, and targeted interventions.
Pakistans Poverty Reduction Strategy Paper (PRSP) wr i t t en in 2003 (Worl d Bank, 2003b) gives
3.
earlier wor k on output and input markets, and anticipates future analytical wor k on the rural non-farm
economy and other key aspects o f the rural economy. The report i s designed to i denti fy the mai n factor
market inefficiencies in rural Pakistan, provi de estimates o f thei r impact in terms o f effi ci ency and equity,
and suggest pol i cy measures to i mprove the functi oni ng o f these markets, increase rural incomes and hel p
reduce rural poverty.
This report focuses on one aspect o f this complex puzzle - rural factor markets. I t builds on
4.
constraints and statistical analysis o f recent household survey data. Key new findings include quantitative
estimates o f the importance o f linkages across factor markets and the impact o f factor market
inefficiencies on agricultural output and revenues. In addition, the report presents analysis showi ng that
for the 61 percent o f rural poor households that do not cultivate crops (agricultural laborers and non-farm
households), expansion in output o f maj or crops may not be sufficient to significantly raise their incomes,
even with substantial mul ti pl i er effects on the r ur al non-agricultural economy.
In presenting the results, each factor i s discussed in tum, drawi ng on descriptions o f i nsti tuti onal
Promoting Efficiency and Equity: The Role of Factor Markets
5. Trade and exchange rate pol i cy reforms undertaken in the late 1980s greatly reduced the
divergence between domestic and international prices for most maj or agricultural commodities in
Pakistan, and in general increased incentives for producti on and farmer incomes. Al though some trade
taxes and marketing restrictions on agricultural outputs s t i l l remain, l ack o f access t o land, water and
capital, and inefficiencies in factor markets for land, water, labor and capital are now among the greatest
impediments to agricultural and rural income growth, and reductions in rural poverty.
6.
allocated t o i t s most productive use, thus maxi mi zi ng value added and incomes. Inefficiencies in these
Wel l -functi oni ng factor markets can hel p ensure that the available supply o f these factors i s
xi
factor markets, whether due to structural characteristics o f the factors or administrative procedures and
policies, increase costs o f transactions or even prevent transactions f r om occurring, however, and thereby
l ead to a mi sal l ocati on o f factor resources that reduces output and economic growth. This report does not
attempt t o di rectl y measure the relative contributions o f structural characteristics and pol i cy distortions,
but instead presents statistical evidence o f the existence o f factor market distortions and their effects (e.g.
producti vi ty effects arising f r om l ack o f access to credit for small farmers). To the extent that
inefficiencies in factor markets are due to pol i cy distortions, administrative and pol i cy reforms can
i mprove producti vi ty. Where the inefficiencies are due to the very structure o f the factor market, (e.g.
uneven distribution o f l and holdings or the physical properties o f the Indus ri ver i rri gati on system that
limit storage and control o f water flows), administrative and pol i cy reforms alone wi l l not necessarily
result in large efficiency or equity gains.
7.
markets, and between l and and credit markets, mean that structural and pol i cy-i nduced inefficiencies in
one factor market have significant implications for hnct i oni ng o f other factor markets. These
inefficiencies in factor markets can have particularly adverse effects for the poor, who often l ack bot h
employment opportunities and the access t o the land, water and capital that woul d enable them t o earn
higher returns on their labor in own-farm or own-enterprise activities.
Moreover, maj or linkages between factor markets, most importantly between l and and water
Land
8, Land i s at the heart o f Pakistan agriculture and the rural economy, and returns t o l and are
estimated t o be about hal f o f incomes (value added) fi-om crop agriculture. Di stri buti on o f l and i s highly
skewed, however, a maj or cause of income inequality in rural Pakistan.. Accordi ng t o the 2000
Agri cul tural Census, onl y 37 percent o f rural households owned land, and 61 percent o f these land-
owni ng households owned less than 5 acres, (1 5 percent o f total land). Two percent o f households owned
50 acres or more (accounting f or 30 percent o f total land). The overall Gini coefficient o f l and ownership
in 2000 in Pakistan was 0.66 i ncl udi ng rural landless households, the Gini coefficient was 0.86. By
comparison, Gini coefficients for l and ownership are 0.71 in India, 0.42 in Bangladesh, and 0.85 in
Brazi l .
9. Land i s rarely bought and sold due to high transactions costs, potential disputes about accuracy o f
l and records, l and prices in excess o f the discounted value o f potential agricultural earnings f r om the land,
and l ack of access to credit by those wi thout land. The l ow frequency o f l and transactions helps
perpetuate the highly unequal distribution o f land, hamper labor mobi l i ty, and reduce returns t o f ami l y
labor. Highly skewed l and distribution and inefficiencies in l and markets also limit access t o credit for
many households, since l and i s the maj or acceptable f or m o f collateral in formal credit markets. Land
rentals in various forms are more common, however 33 percent o f area cultivated in 2000 was under
some f or m o f tenancy arrangement according t o 200 1-02 HI ES data (1 8 percent under share-cropping).
10.
that of small farms, hol di ng other factors constant. For example, pl ot-l evel regressions o f producti vi ty,
correcting for pl ot characteristics and some household characteristics (such as tractor ownership and
number o f household workers) suggests a doubl i ng o f operated area leads t o 10 percent l ower wheat
yields (and 13 percent l ower ri ce yields), ( Wor l d Bank, 2002). Far m household i ncome data also show
that small farmers have higher net returns per hectare than do large farms. These findings suggest that
increases in the share o f l and cultivated by small-holders woul d tend t o increase overall f ar m producti vi ty
in Pakistan.
Most empirical evidence indicates that producti vi ty o f l and on large farms in Pakistan i s less than
1 1.
producti vi ty. Productivity of share-croppers i s about 20 percent l ower than producti vi ty o f landowners,
Econometric evidence also suggests that tenure arrangements have significant impacts on
xi i
hol di ng other factors constant, because o f l ower incentives for own-labor inputs. Though share-cropping
i s decl i ni ng as a f or m o f tenancy, the benefits t o share-croppers (shared financial r i sks o f crop failure and
credit for purchase o f inputs) and owners (greater owner input i nto management decisions) l i kel y explain
i t s persistence as a tenancy arrangement.
12. Three maj or attempts at redistributive l and r ef or m in Pakistan have fai l ed (most recently in 1977),
and l and r ef or m has neither pol i ti cal support, nor the backi ng o f Islamic religious authorities. Because o f
these severe i nsti tuti onal constraints to traditional redistributive l and reform, more feasible options t o
increase access t o l and by poor households i nvol ve a win-win approach. Land purchase schemes that
include grant components for the poorest landless households are one example, though fiscal costs coul d
limit the scale o f such programs. Pol i cy measures to increase access to l and also include increased access
t o credit t o enable poor households t o purchase land, l and taxation to reduce incentives for hol di ng l and
for speculative purposes, and measures t o i mprove the effi ci ency o f l and sales and rental markets.
13. Admi ni strati ve reforms in the enforcement o f existing norms and regulations, i ncl udi ng
enforcement o f contracts and the rights o f tenants, and lifting restrictions for rentals woul d also help
i mprove the functi oni ng o f l and markets. Si mpl i fi cati on o f complicated l egal procedures that resul t in
l ong delays in proceedings and a backl og o f cases woul d reduce l and transactions costs. Poor households
are at a particular disadvantage in cases brought before ci vi l courts, since they often cannot afford t o
pursue these cases. Possible steps include limits on the number o f appeals, procedural reforms,
alternative confl i ct resolution mechanisms, and barri ng o f the j uri sdi cti on o f ci vi l courts in l and revenue
matters. Improved dissemination o f i nformati on on l and prices and transactions woul d also enhance
effi ci ency o f l and markets.
14.
security o f tenure. Wi thout secure rights to their land, farmers not onl y have less incentives for
investment, but also devote resources to defending their rights. Lack o f secure ti tl e also reduces access to
l and by landless households through rentals by increasing the risk o f landowners who might otherwise
rent out more land. In addition, banks are reluctant t o l end money using l and as collateral because they
do not t rust the current recording system. Questions regarding the val i di ty and enforceability o f t i t l es also
make i t harder t o buy and sell land. Computerization o f l and records, as tested in a recent pi l ot proj ect in
Punjab, i s one opti on for establishing clearer l and records and reduci ng fraudulent dealings by l and
administration officials.
Improvements in l and records' coul d also enhance the efficiency o f l and markets and increase
Water
15.
droughts, water availability at the farm l evel i s a maj or determinant o f f ar m producti vi ty in Pakistan
agriculture. Nearl y 80 percent o f cropped area i s irrigated, and agriculture i s by far the largest user o f
available water sources in the country, consuming on average about 95% o f available water resources. In
2001-02, out o f 18.0 mi l l i on hectares o f irrigated land, 38 percent was i rri gated solely with canal water;
39 percent with canal and tube wel l water, and 19 percent solely with tube wel l water. Effi ci ency o f
water use in surface i rri gati on i s l ow, however: conveyance losses (part o f whi ch adds t o groundwater
recharge) are 55 percent o f total canal diversions.
Gi ven l o w levels o f annual rai nfal l concentrated over onl y a few months o f the year and peri odi c
16.
warabandi system o f allocation o f water through administratively set rotations. Access t o canal water i s
In principle, access t o canal water i s determined by physi cal l ocati on along the canal and the
In Punjab, l and disputes are pri mari l y due t o fraudulent dealing because the records are not clear and patwars (land
administration officials) often accept i nf ormal payments.
xi i i
thus expl i ci tl y t i ed t o access to land. Ownership o f a pl ot within a watercourse command area confers
access t o i rri gati on water, but does not guarantee canal water availability. In particular, water availability
decreases si gni fi cantl y if the watercourse i s located near the tai l o f the distributary or mi nor, and/or if the
pl ot i s located near the tai l end o f the watercourse (Worl d Bank, 2002). Water theft by farmers upstream
i s a maj or reason f or these water shortages faced by these tai l end farmers. Recent administrative reforms
in some parts o f Si ndh giving greater control t o farmer organizations have reduced water theft, as wel l as
i mproved maintenance o f water courses and collection o f fees.2 These coul d be expanded t o other
regions, as wel l . Other alternatives for i mprovi ng delivery o f surface i rri gati on water services t o farmers
also exist, i ncl udi ng private professional canal management.
17. Avai l abi l i t y o f groundwater has an even higher i mpact on yields than does canal water, but onl y
8.1 percent o f cul ti vati ng households owned tube wells in 2001/02. Informal groundwater markets
si gni fi cantl y i mprove access t o groundwater, particularly for small farmers, landless tenants and younger
households who often l ack the resources (or l and and water rights) to install their own tube wel l .
However, water purchasers do not have full access rights to the water, and are frequently denied access
when water or energy supplies are scarce. Moreover, access t o tube wel l water depends on the proxi mi ty
t o an existing tube wel l and conveyance mechanisms (e.g. channels) to distribute the water.
18. I nf or mal water markets for surface i rri gati on (mai nl y barter) and groundwater exist, but
establishment o f water markets that woul d permi t trading o f water rights across the canal system (such as
those in Chi l e and Mexi co) woul d require maj or institutional changes and investments. In particular, any
system o f tradable water rights woul d need t o account for the mi ni mal degree o f water control above the
water course l evel in the current Indus basin system, because o f the absence o f sufficient storage capacity
and control structures (gates) to regulate water flows.
19. Several institutional changes coul d bring about maj or improvements in the effi ci ency and equity
of water use in Pakistan agriculture, with or wi thout the establishment o f water markets, however. First,
in order to increase accountability for Operations and Maintenance, management o f distributaries and/or
mi nors coul d be transferred t o Farmer Organizations (FOs), permi tti ng assessment, col l ecti on and
retention o f abiana (water charges) by the FOs. Second, t o increase transparency and enable more
i nformed decisions on area irrigated and crop choice, a) peri odi c measurements o f the actual rate o f water
fl ow at various points in the water course coul d be made; and b) open access to the wri tten rules o f the
water rotati on coul d be provi ded to farmers. Third, reforms in the institutional arrangements for
allocation o f water coul d be made t o create a more demand-driven system. Options include: a) Water
Course Associations, Water Users Associations and Area Water Boards (AWBs); b) Professional canal
management.
20.
establishing l egal tradable water rights at the nati onal and provi nci al levels; ii) strengthening l ocal
institutions (such as Water Course Associations and Water Users Associations or professional canal
management agencies) to enable them t o serve as brokers in water markets, hel pi ng t o match buyers and
sellers o f water. Once effective water markets were developed at the water course level, trades between
water courses coul d be brokered through these l ocal institutions at the mi nor level.
Development o f effective water markets woul d require t wo steps beyond those outl i ned above: i)
2 1.
establishment o f water markets), combined with appropriate trade and macro- policies, can facilitate
The experience o f Chi l e shows that i mproved allocation o f water, (in the Chilean case through the
In the command area covered by the Lef t Bank Area Water Boar d in Sindh, where t ai l end farmers had not
received water in three years, 48 i l l egal direct outlets servi ng an area o f about 25 thousand hectares were closed in
early 2004.
xiv
diversification o f agriculture i nto high-value products for urban and export products, increased labor
demand and reductions in rural poverty. Gi ven the infrastructure constraints in Pakistan, the potential
gains f r om establishing water markets may be smaller than in other countries. Nonetheless, benefits o f
more efficient allocation o f water through institutional reforms with or wi thout water markets coul d st i l l
be substantial if they are combined with other measures to promote agricultural diversification, i ncl udi ng
strengthening security o f l and titles, publ i c investments in rural infrastructure (roads and electricity),
private investments in processing and storage, and establishment o f market links to export markets.
Labor Markets
22.
constraints, rather than supply constraints, as evidenced by substantial underemployment. There i s
considerable labor mobi l i ty, in spite o f high transactions costs i nvol ved in j ob search and especially in
migration, However, formal sector employment in rural areas i s mi ni mal , and over 80 percent o f
agricultural labor and most o f rural non-agricultural labor i s self-employed. Female participation in labor
markets remains l i mi ted, though: onl y 16 percent for females age 15 and over (not i ncl udi ng home-based
activities), compared with 85 percent for males. Job s k i l l levels for bot h mal e and female labor are
generally l ow.
Unlike the markets for l and and water, rural labor markets are generally characterized by demand
23, Education i s an important determinant o f female labor force participation, rural-urban migration,
and labor producti vi ty in rural non-fann sectors. Econometric analysis shows that education i s also a key
determinant o f agricultural producti vi ty. For the average produci ng household, another year o f education
translates i nto a 13% increase in yearly net revenues. Effecti ve and more wide-spread vocational trai ni ng
programs coul d provi de needed ski l l s for non-agricultural labor. Womens access t o educational and
trai ni ng institutions coul d be increased through more reservation o f spaces for women.
24.
percent per year f r om 1984 t o 1994, i ndi cati ng l ong t er m tightening o f the labor market. Likewise, real
wage rates o f construction laborers increased by 1.1 percent over the same period. Most o f the increases
in real wage rates took place in the 1980s, however. The trends in the 1990s indicate l i t t l e gains in real
wages. Fr om 1991-97, real wage rates o f casual agricultural laborers grew by an average o f 0.8 percent
per year, whi l e real wage rates o f regular agricultural workers f el l by 2.4 percent per year. Likewise, real
wage rates o f construction laborers grew by onl y 0.4 percent per year f r om 1991-97 and for the 1991-
2002 as a whole, f el l by 0.4 percent per year.
Real wage rates o f bot h regular and casual agricultural workers increased by an average o f 1 .O
25,
but st i l l positive per capita agricultural growth. This suggests rather weak linkages between agncultural
growth and rural labor demand. The smaller rate o f decline o f real wages f or construction laborers
suggests that l ack o f labor mobi l i t y between sectors and between rural and urban regions hinder
integration o f non-agricultural and agricultural labor markets
The decline in real wages in the agricultural sector in the 1990s coincides with a peri od o f slower
26.
leave farming to sell or rent out their f ar m land. This woul d require greater security o f property rights, and
facilitation o f l and transactions that are presently stifled by the absence o f a val i d title, r i sks o f court
challenges, and high regulatory and transactions costs (for example, stamp duty plus registration fee plus
capital tax amounted t o 16% o f the average market pri ce of l and in 1995).
A better functioning l and market coul d also promote labor mobi l i ty, hel pi ng farmers who want t o
27.
also needed. In addition, measures to assist households trapped in bonded labor arrangements, i ncl udi ng
A concerted effort t o enforce existing legislation regarding the rights o f women and chi l dren i s
xv
l egal protection, provi si on o f credit and debt cancellation programs should be urgently ~onsi der ed. ~
Al though these programs often face considerable opposition f r om powerful vested interests, such
programs coul d have a maj or impact on some o f the poorest rural households.
Credit
28. In principle, credit markets offer a wi de scope for policies t o increase producti vi ty and t o reduce
r ur al poverty, and can help overcome inefficiencies in other factor markets. In Pakistan, however, access
t o formal credit markets in rural areas i s generally l i mi ted to landowners, since l and i s the mai n f or m o f
acceptable collateral for loans. Accordi ng to Pakistan Rural Household survey data, onl y 11 percent o f
farmers obtained formal sector loans in 2001-02. Access to i nformal credit markets, particularly
suppliers and consumers credit i s more widespread, (75 percent o f farm households received loans), but
approximately 40 percent o f rural (farm) households are credit constrained, not bei ng able t o obtain as
much credit as they woul d l i ke at existing interest rates.
29.
farm producti vi ty (measured as gross value o f output per unit o f land). Households who faced credit
rati oni ng in bot h the formal and i nformal sectors (approximately 17 percent o f al l households) had a 23
percent reduction in value o f yields. Further streamlining o f l endi ng procedures, development o f
alternative forms o f collateral, and other l endi ng innovations t o increase access o f small farmers t o
commercial credit coul d help relieve these credit constraints for small farmers.
Econometric analysis o f plot-level data suggests that l ack o f access to credit significantly reduces
30.
loans in the formal sector) coul d eliminate these policy-induced incentives toward capital-intensive
technologies that reduce labor demand. Efforts at promoti ng agricultural diversification should thus avoi d
subsidies on credit that woul d encourage capital-intensive technologies in production, processing and
marketing. Instead, agricultural diversification, the development o f the rural non-farm sector and poverty
reduction may be better achieved through publ i c investments in electricity, transport and other
infrastructure. Further wor k on particular constraints to r ur al non-farm investment, employment and
growth i s needed, however.
Removal o f subsidies on credit (i mpl i ci t in the conti nui ng l o w repayment / high default rates for
3 1.
other forms o f collateral (besides land) coul d also hel p promote rural employment and income generation.
Rural credit f r om formal sources i s currently available for a narrow range o f agricultural producti on
activities and does not serve the needs o f the non-farm sector. In particular, availability o f medi um-term
credit i s extremely l i mi ted. Increased access t o credit by smal l scale enterprises in rural areas, f or
example, woul d promote farm t o non-farm linkages, develop the rural non-agricultural sector and increase
labor demand. Targeted matchi ng grants t o poor households for income-generating activities are one
option.
Production credit and micro-credit programs targeted t o landless and small farmers that requi red
32. The Government o f Pakistan in recent years has, in fact, placed considerable emphasis on
developing micro-finance as part o f i t s poverty alleviation strategy. In 2003, Rs. 1,442 mi l l i on (2.5 % o f
total institutional credit) was disbursed as small loans through the Pakistan Poverty Al l evi ati on Fund
(PPAF), Khushal i Bank and the Zarai Taraqiati Bank Li mi t ed (ZTBL, formerl y called ADBP). No
Nearl y 200 thousand rural households in Si ndh and Punjab (equivalent t o about 2 percent o f Pakistans rural
population), were estimated t o be in debt bondage based on 1990 Agri cul t ural Census data. Analysis o f 2000
Agri cul tural Census data suggests that in Punjab alone, 50 thousand sharecroppers were in debt bondage, equivalent
t o about 9 percent o f total landless tenant farmers in Punjab.
xvi
comprehensive study o f the overall impact o f these micro-credit schemes has yet been done, and there
remains a maj or concern regarding financial sustainability o f these programs. Promoti on o f savings
mobi l i zati on schemes and implementation o f an adequate regulatory fkamework f or deposit-based
institutions coul d hel p provide sustainable resources for micro-credit.
Income Distribution and Poverty Reduction
33. Increased agricultural production has been a maj or force for reducing rural poverty over much o f
South Asi a over the past four decades. Rural poverty in Pakistan did not decline in the 199Os, however,
in spite o f agricultural growth. Overestimation o f true sectoral growth rates because o f abrupt changes in
estimates o f l i vestock population i s part o f the explanation for this l ack o f correlation between agricultural
growth and poverty reduction. Stagnation in the real consumer prices o f ri ce and wheat (in contrast t o
declines in early decades) i s another maj or factor.
34. Two other maj or factors are the changing structure o f the Pakistan economy, in particular the
decl i ni ng share o f agriculture in total GDP (39 percent in 1970, but onl y 24 percent in 2000), and the
persistent unequal distribution o f l and (and l and revenue). Moreover, since more than 60 percent o f rural
poor households are not farm households (according t o HI ES 2001-02 data), the magnitude o f these
l i nkage effects with the non-agricultural sector i s crucial to the poverty impacts o f agricultural growth.
Rur al non-farm households account for 46 percent o f the rural poor; agricultural laborer households
comprise 15 percent o f the rural poor. Though there i s substantial poverty among smal l l andowni ng
farmers (38 percent are poor), this group accounts for onl y 24 percent o f total rural poor households.
Landless tenant farmers (61 percent o f whom are poor) account for another 13 percent o f the rural poor.
35. Model simulation results o f the direct and mul ti pl i er effects o f a 10 percent increase in the output
o f al l maj or crops (wheat, basmati and IRRI rice, cotton and sugar cane, whi ch together account for about
35 percent o f total agricultural value-added) suggest that the largest gains o f increased producti on o f these
maj or crops accrue to large and medi um l and owners, whose incomes ri se by 7 percent. Incomes o f smal l
f ar m owners and pure tenants also r i se by about 5 percent. But the poorest rural household groups
(agricultural laborers and rural non-farm poor -- 29 percent o f the rural population) reap onl y 7 percent o f
the total i ncome gains, and their incomes ri se by onl y 3-4 percent. Gains f r om a 10 percent increase in
l i vestock producti on (mainly cattle, goats and dai ry products) are more evenly spread out gi ven the
di stri buti on o f ownership o f livestock, suggesting that measures to increase livestock producti vi ty may
have more positive effects on equity.
36.
suggest that a shift f r om share-cropping t o f i xed rent s woul d remove labor disincentive effects and raise
the producti vi ty o f former share-croppers t o equal that o f l and owners (affecting 18 percent o f area
cultivated in Pakistan) woul d raise average incomes o f tenant farmers by 3 to 4 percent (and incomes o f
farmers directly impacted by the reforms by about 10 percent), but are l i kel y t o have onl y smal l overal l
impacts on rural incomes in aggregate. Releasing constraints on access t o credit has si mi l ar impacts o n
smal l farmers, as well as i nduci ng an estimated 2 percent gai n in average incomes o f the r ur al non-farm
poor, Raising producti vi ty o f farmers at the tail-end o f watercourses t o match that o f head-end farmers
through increased access to water, if it coul d be achieved wi thout reducing the producti vi ty o f head-end
farmers, woul d have even larger impacts on small farmers (4-6 percent average income gains) and coul d
raise incomes o f the rural non-farm poor by 3 percent.
Similarly, in spite o f mul ti pl i er effects on agricultural and non-agricultural output, simulations
37.
poor through combined direct and multiplier effects, i t i s unl i kel y to be sufficient t o rapi dl y raise incomes
o f the 30 percent o f the rural popul ati on (and 61 percent o f the rural poor) who are landless agricultural
laborers and non-agricultural rural poor households. In the absence o f a change in the structure o f r ur al
Thus, although agricultural growth can have a maj or i mpact on a sizeable segment o f the r ur al
xvii
incomes and employment or significant gains in the rural non-farm economy apart f r om agricultural
growth-induced l i nkage effects, targeted interventions t o agricultural laborers and the r ur al non-farm poor
will be needed.
38.
2003b) recognizes this expl i ci tl y. In addition to advocating sustained and broad based economic growth
emanating f r om the rural areas the strategy also emphasizes the simultaneous provi si on o f social and
economic services and infrastructure for the poor, creating j ob opportunities and i mprovi ng governance as
essential elements. A more detailed rural development strategy i s s t i l l needed, however.
The Poverty Reduction Strategy Paper (PRSP) o f Pakistan issued in December 2003 (Worl d Bank
39.
decades that make factor market reforms cri ti cal to increasing agricultural producti vi ty and raising
incomes o f the r ur al poor. Rur al popul ati on has steadily increased, gradually reduci ng average farm sizes
in the face o f constraints on the overall supply o f arable l and and water. The size o f the agricultural
sector relative to the overall economy has steadily shrunk, as the output o f the rural non-farm economy
has expanded, tending t o lessen the i mpact o f agriculture on the overall rural economy.
Significant structural changes have taken place in Pakistans economy over the past several
40.
growth can pl ay a maj or rol e in increasing incomes and reducing poverty among f ar m households.
Experience o f other countries suggests that factor market reforms, coupled with outward-oriented trade
and exchange rate pol i cy can lead t o rapi d agricultural growth and rural poverty reducti on through
diversification o f agricultural producti on i nto high-value products (e.g. fruits and vegetables) with labor-
intensive producti on and processing. Reforms in factor markets that promote the allocation o f scarce l and
and water resources t o their most efficient uses, and increase ret urns t o unski l l ed labor, are essential for
replicating this success in Pakistan.
Even in the face o f increasingly severe constraints on l and and water resources, agricultural
41. However, because many rural poor households l ack access to land, agricultural growth alone i s
not sufficient to significantly raise incomes of a large fraction o f the rural non-farm poor, even with i t s
substantial mul ti pl i er effects on the non-agricultural economy. Policies and programs t o increase access
t o credit and enhance worker and entrepreneurial ski l l s can directly support growth in the r ur al non-
agricultural economy and further raise incomes o f the rural non-farm poor. Targeted interventions are
also needed t o reach the poorest households i ncl udi ng expansion o f micro-credit, enforcement o f l aws o n
bonded labor, and trai ni ng in marketable ski l l s.
I. RURAL FACTOR MARKETS IN PAKISTAN: POLICY REFORMS
FOR GROWTH AND EQUITY
I. INTRODUCTION
1.1
with agricultural Gross Domestic Product (GDP) increasing by an average o f 4.1 percent per year
f r om 1975 t o 2000. Green revol uti on technology o f i mproved seeds, irrigation, and increased
fertilizer use spurred rapi d growth in crop agriculture (especially wheat and rice) begi nni ng in the
later 1960s. Li vestock producti on outpaced the rapi d growth in crop agriculture, with value added
increasing by 5.3 percent per year f r om 1975 to 2000.
Palustans agricultural sector has enjoyed steady growth for most o f the last three decades,
1.2
particularly in the 1980s. Rural poverty fel l f r om 49.3 percent in 1984-85 t o 33.4 percent in 1993-94,
contributing t o an overall decline o f poverty in Pakistan f r om 46.0 percent in 1984-85 t o 28.6 percent.
Long-term agricultural growth has also been accompanied by reductions in rural poverty,
Table 1.1. Poverty Estimates for Pakistan
1984-85 1987-88 1990-91 1993-94 1998-99 2001-02
Urban 38.2 30.7 28.0 17.2 24.2 22.7
Rural 49.3 40.2 36.9 33.4 35.9 38.9
Overall 46.0 37.4 34.0 28.6 32.6 32.1
Note: 1998-99 data from PIHS; al l other years HI ES. PI HS and HIES combi ned since 1998-
99
Source: Wor l d Bank (2002), p. 20. For 2001-02, Government o f Pakistan Pakistan
Economi c Survey (2002-03)
1.3 More recent trends of agricultural incomes and of rural poverty are far less
encouraging. However, agricultural GDP f el l by 1 percent between 2000 and 2002, in large part
because o f drought, highlighting the vulnerability o f Pakistan agriculture and the importance o f
availability o f water as a maj or constraint f or many farmers. Likewise, the l ong-term downward
trends in rural poverty have not continued: estimates o f r ur al poverty f or 2001-02 o f 38.9 percent
suggest that for the 1990s as a whole, rural poverty has not declined in spite o f agncultural GDP
growth.
1.4
o f generally favorable policies affecting markets and prices o f agricultural outputs and non-factor
inputs (e.g. seeds, fertilizer and pesticides). Maj or macro-trade pol i cy and output market reforms in
1980s reduced the bias against apcul t ur al producti on in Pal st an refl ected in prices o f agncultural
outputs and inputs relative t o those in the non-agricultural sectors. Though some trade taxes and
marketing restrictions remain, the incentive structure for producti on o f maj or crops (wheat, cotton,
basmati and IRRI rice, and sugar cane) i s more favorable today than in the early 1980s when
substantial growth occurred.
The deceleration o f agricultural growth and the rate o f poverty reducti on has occurred in spite
1.5 Long-term agricultural growth and rural poverty reducti on are st i l l constrained by the
structure and performance o f key rural factor markets (land, water, l abor and credit), however. These
four factor inputs i nto production, and the markets that facilitate their effi ci ent allocation across
alternative uses, are key determinants o f agricultural producti on and growth. Moreover, retums to
these factors o f production, and their structure o f ownership across households, are maj or
determinants o f rural household incomes and poverty.
2
1.6
producti on woul d be the same for al l activities. Profi t maxi mi zi ng households and f i r ms woul d
uti l i ze factors up t o the poi nt where margi nal returns to each factor equaled i t s cost (the market pri ce
o f the factor). Any excess demand for a factor coul d be purchased at the market price; si mi l arl y any
excess supply o f a factor coul d be sold at the market price. The economic real i ty in r ur al Palustan i s
far different f r om the economic theory o f perfectly functioning factor markets, however, as
inefficiencies in markets for land, water, labor and capital result in l ower producti on and incomes.
In a perfectl y competitive market, economic theory suggests that returns t o each factor o f
1.7
l and ownership or physical properties o f the Indus river i rri gati on system that limit storage and
control o f water flows) or administrative procedures and policies (e.g. l ack o f clear l and titles) can
increase costs o f transactions or even prevent transactions f r om occurring, however, and thereby lead
t o reduced output and economic growth. However, t o the extent that inefficiencies in factor markets
are due to the very structure o f the factor market, (e.g. uneven distribution o f l and hol di ngs or the
physi cal properties o f the Indus ri ver i rri gati on system that limit storage and control o f water flows),
administrative and pol i cy reforms alone wi l l not necessarily result in large effi ci ency or equity gains.4
These inefficiencies, whether due t o structural characteristics o f the factors (e.g. the pattern of
1.8 Land i s the most immobile and most unequally distributed of the factors, and land sales
markets in Pakistan are very thin. The absence o f well-functioning l and markets hinders access t o
l and for the landless or small farmers, and perpetuates a highly skewed di stri buti on of l and
ownership. Land rentals in various forms (share-cropping, cash rentals) are more common, however,
20 percent o f area cultivated in 2000 was under some f or m of tenancy arrangement. Most empirical
evidence suggests that producti vi ty of l and on large farms in Pakistan i s less than that o f small farms,
hol di ng other factors constant. Moreover, bot h economic theory and empi ri cal evidence suggest that
producti vi ty o f l and under tenancy arrangements wi l l be less than producti vi ty o f owned land. Thus,
the absence o f a well-functioning l and market results in l ower overall output, whi l e the skewed ness
o f l and ownership contributes t o widespread rural poverty.
1.9 Access to water in Pakistan i s closely tied to access to land, and water markets are
nearly as thin as those o f land. Throughout the Indus basin, surface water i s allocated through the
warabandi system in whi ch water fl ows are regulated administratively on a rotati ng basis. Tradi ng o f
canal water i s common (although sales o f canal water are illegal), but i s l i mi t ed t o trades with farmers
in the same distributary. Groundwater i rri gati on (mainly by tube wells) supplements surface
i rri gati on for many farmers, increasing the rel i abi l i ty o f water supply and crop yields. Purchases o f
groundwater increase access to water and yields o f small holders and tenants, but l i kewi se are limited
by distance the water must travel (often through unl i ned watercourses).
1.10
underemployment. Lack o f access t o l and limits self-employment opportunities f or smal l farmers and
landless households, whi l e subsidized formal sector credit encourages labor-displacing
mechanization. Informal labor markets account f or essentially al l employment in r ur al areas, but
agricultural labor demand remains highly seasonal. Rur al non-farm employment i s mai nl y self-
employment, and ret urns t o labor are constrained in part by l ack o f ski l l s and physi cal capital.
Female labor force participation i s l ow: in rural areas onl y 32 percent, even when 14 household labor
activities are included.
Rur al labor markets for mal e labor generally functi on well, though there i s substantial rural
This report does not attempt t o di rectl y measure the rel ati ve contributions o f structural
characteristics, but instead presents statistical evidence o f the existence and effects o f factor market
distortions (e.g. producti vi ty effects arising f r om l ack o f access t o credit f or smal l farmers).
3
1.1 1
credit i s determined by government monetary and banking pol i cy. There are substantial inefficiencies
in formal credit markets, however, where credit i s rationed and the landless and small farmers l ack
the collateral t o access credit. These groups get almost al l o f their credit through i nformal markets, or
through tied arrangements with landlords, employers or traders. Nevertheless, access t o i nformal
sector credit f or poor households can be problematic, as evidenced by instances o f bonded labor
arrangements.
Credit markets are potentially the most flexible o f al l factor markets since overall supply o f
1.12 Because o f the strong linkages across rural factor markets in Palustan, inefficiencies in one
market can adversely affect the performance of other markets, magni fyi ng the effi ci ency losses and
consequences for i ncome distribution. For example, ownership o f l and i s a maj or determinant o f
access to formal credit; water rights also are ti ed to ownership or user rights t o land. The skewed
distribution o f l and thus results in a skewed access to water and credit, and the earnings derived f r om
these factors. Better functi oni ng water and credit markets, however, coul d hel p ease the adverse
efficiency and distributional consequences o f skewed l and ownership.
Plan of the report
1.13
policies. Sections 3 through 6 then analyze the four factor markets (land, water, labor and credit) in
turn. Section 7 discusses the implications o f agricultural growth and inefficiencies in factor markets
for rural poverty in Palustan, drawi ng on analysis o f farm-level data and model simulations. Section
8 concludes with a summary o f the maj or findings, lessons f r om other countries, and pol i cy
implications.
Section 2 o f this report presents an overview o f Palustans agriculture and agricultural
11. AGRICULTURAL POLICY AND SECTOR PERFORMANCE IN
PAKISTAN: AN OVERVIEW
2.1,
rural household incomes and about 25 percent o f national GDP. Bot h crop and livestock sub-sectors have
enjoyed substantial growth over four decades, but Pakistans agriculture remains highly susceptible t o
droughts and i s heavi l y reliant on irrigation.
The agricultural sector i s at the heart o f Pakistans rural economy, accounting f or 70 percent o f
2.2. The agriculture sector has maintained a long-term annual growth rate of 3.7 percent over
the period o f 1959-60 to 2001-2002 with wide year-to-year variations. Apart f r om a peri od o f sl ow
growth in the f i r st hal f o f the 1970s, average agricultural growth exceeded 3.2 percent per year in each
quinquennium f r om 1960 t o 2000. However, the performance o f the agriculture sector (particularly the
crops sub-sector), has suffered in recent years because o f severe droughts in the country. Agri cul tural
GDP f el l by 2.64 percent in 2000-01 and grew by onl y 1.39 percent in 2001-02 (table 2.1).
Table 2.1 Agricultural Growth in Pakistan, 1959-60 to 2001-02
Agriculture Crops Livestock Wheat Rice Cotton SCane Maize
1960-65
1965-70
1970-75
1975-80
1980-85
1985-90
1990-95
1995-00
2000-01
2001 -02
3.78 4.76
6.26 8.18
0.78 0.49
3.91 4.15
3.28 2.63
4.57 3.70
3.93 3.02
4.81 3.19
-2.64 -7.11
1.39 -0.09
1.90 3.27 4.88
1.97 9.70 12.20
3.07 7.19 6.80
4.77 1.51 0.61
6.12 4.1 1 -0.58
5.70 3.50 1.37
6.57 4.39 8.39
4.86 -3.33 -5.49
3.42 -2.42 -11.10
2.01 1.02 -0.74
5.32 11.85 1.30
7.24 7.15 4.82
2.64 -4.23 2.26
3.61 5.29 3.21
6.73 3.17 3.27
7.62 2.01 2.79
0.32 5.85 2.25
5.26 -0.36 4.62
-1.88 -4.85 -1.87
6.46 4.10 -0.64
1960-2002 3.67 3.50 3.98 3.77 3.28 4.41 3.65 2.99
1990-2003 3.46 2.40 5.79 2.44 3.31 0.83 2.66 3.59
Source: M. Ahmad, (2003).
2.3. Agricultural incomes in Pakistan are nearly evenly split between crop and livestock
agriculture. The crops sub-sector currently contributes about 54 percent o f the value added, with maj or
crops (wheat, cotton, rice, sugar cane) accounting for 38 percent o f total agricultural GDP and mi nor
crops contributing 16 percent. Wheat, cotton and ri ce together account for 60 percent area cultivated
nati onal l y (table 2.2). The livestock sub-sector, dominated by dairy, sheep and poultry, has increased i t s
share over time, f r om onl y 25 percent in 1982 to i t s present l evel o f 46 percent. Fish and forestry are
mi nor sectors in Pakistan, accounting for 2.2 and 0.3 percent o f agricultural GDP, respectively.
5
Table 2.2 Area, Yield and Production of Maj or Crops in Pakistan, 1999-00 t o 2002-03
Area Area Area Yield Yield Production Production
Notes: Oilseeds includes rapeseed, mustard and sesamum.
Other includes f r ui t s, vegetables and al l other crops.
Gr owt h rates are average growth rates, 1990-9 1 t o 2002-03, 2002103 data are prel i mi nary.
Source: Economic Survey of Pakistan, 2003, (tables 2.1 and 2.4).
2.4.
constraint on agricultural production at the f ar m level. 82 percent o f area cultivated o f Pakistans
maj or crops i s grown on irrigated l and (both surface and groundwater), with cotton, r i ce and sugar cane
grown exclusively on irrigated land.
Over 80 percent of arable l and in Pakistan i s irrigated, and availability of water i s a maj or
2.5. Dominant cropping patterns vary across Pakistan according to soi l type and water
availability. In the northern irrigated areas o f Punjab, basmati ri ce i s cultivated in the monsoon season
(kharif), fol l owed by wheat in the wi nter season (rabi). In southern Punjab and northern Sindh, cotton i s
the maj or khar i f crop, with the wheat crop i mmedi atel y f ol l owi ng5 In southern Si ndh where drainage
problems inhibit cultivation o f cotton and war m night temperatures reduce wheat yields, non-aromatic
ri ce (typically called IRRI rice) i s the maj or crop. In dryl and (barani) areas o f northern Punjab and
NWFP, wheat i s cultivated along with pulses and other mi nor crops.
2.6.
irrigation) enabled the crops sub-sector t o grow at an average rate o f 3.5 percent per year over t he
last 40 years. Within the crops sector, cotton producti on grew most rapi dl y (4.4 percent per year).
Wheat, rice, sugar cane and maize also grew at rates in excess o f 3 percent per year (3.8, 3.3, 3.6 and 3.0
percent per year, respectively).
2.7. Annual growth rates o f wheat (2.36%), cotton (0.53%) and sugar cane (2.46%) have been
much lower since 1990. Total area cultivated has increased by onl y 0.18 percent per year as expansion
Adoption of green revolution technology, (improved seeds, increased f er t i l i zer use, and
Here, farmers face a tradeoff between l eavi ng cotton crop in the f i el d f or an additional harvest and delays in wheat
pl anti ng that result in l ower wheat yields. Al t hough area pl anted with cotton i s onl y about 113 o f wheat area, the two
crops each account for about 30 percent agricultural value added at 1980-81 base prices.
6
in mul ti pl e-croppi ng has slowed. Several years o f drought have also l i mi ted area expansion, as wel l as
diminished yields. Much o f the gains f r om the i ni ti al introduction o f new technologies for maj or crops
had been realized by the early 1990s. Average wheat yields in Pakistan (2.12 tonsha) were 16 percent
bel ow average wheat yields in Indi a (2.52 tonsha) over the 1989-90 t o 2002-03 period. Average ri ce
yields were essentially the same as those in Indi a (2.74 and 2.85 tons/ha, respectively).6 Sugar cane
yields in Pakistan are onl y two-thirds those of Indi a (45.5 and 67.7 tonsha, respectively).
2.8. Recent analysis suggests that total factor productivity in crop agriculture in Punjab grew
by only 1.26 percent per year from 1966 to 1994, and that deteriorating soil and water quality are
reducing productivity growth by an average of 0.22 percent per year (Ali and Byerlee, 2002).
Al though l and and labor producti vi ty bot h increased by about 2.5 percent per year f r om 1966 to 1994,
rising costs o f inputs l i mi ted growth in total factor producti vi ty in crop agriculture. Labor use in crop
agriculture in Punjab declined f r om 98.7 daydhectare to onl y 71.7 dayshectare due t o increased
mechanization (tractors, harvesters and t hr e~her s) . ~ Total factor producti vi ty growth in the rice-wheat
cropping system has actually declined, in part due to overuse o f poor-qual i ty tube wel l water, leading t o
soi l salinity.
2.9.
North West Frontier Province (N.W.F.P), and i s a major source of farm earnings in other parts of
Pakistan, as well. Production o f sheep and goats accounts f or 17 percent o f l i vestock value added. Dai r y
producti on (milk and ghee) i s a maj or source o f incomes for l ow i ncome households in the Punjab and
Sindh, with producti on of milk increasing by 80 percent between 1990-9 1 and 2002-03. Poul try
producti on has increased even more rapidly, with the number o f birds and egg producti on increasing by
135 and 145 percent, respectively, f r om 1990-91 to 2002-03, but the sub-sector st i l l accounted for onl y 3
percent o f l i vestock value added in 2002-03.
Livestock production dominates the rural economies in pastoral areas of Balochistan and
2.10.
o f a change in the base for cattle production, Accordi ng t o offi ci al GDP statistics, the value added o f
livestock grew by 26% in 1995-96. This large jump i s the resul t o f using figures f r om the 1995-96
Li vestock Census on the stock o f cattle t o calculate value added in that year wi thout maki ng adjustments
t o livestock figures in previous years. Using the 10-year average l i vestock growth rate o f 5% for 1995-96
(instead o f 26%) reduces agricultural growth rate in that year f r om 12% t o 4.7%. With these adjustments,
agricultural growth during the 1990s i s reduced f r om 4.5% t o onl y 3.1%.
Agricultural markets and prices
2.1 1. The Government o f Pakistan intervenes in bot h output and input markets in order to stabilize
prices and i mprove incentives for agricultural production. Support prices are set f or al l maj or crops
(wheat, rice, sugar cane and cotton), though government procurement takes place onl y f or wheat and
cotton, The Palustan Agri cul tural Storage and Supplies Corporati on (PASSCO) and provi nci al Food
Departments procure 25-40 percent o f total producti on o f wheat, and pri vate market wholesale prices in
Lahore have closely tracked the support pri ce for wheat in most years (table 2.3 and figure 2.1). There
has been no procurement o f basmati or International Ri ce Research Institute (IRRI) ri ce since 1995-96, ,
even in 2000-0 1 when the support pri ce (in ri ce equivalent) was near the wholesale pri ce in Lahore. The
Trading Corporation o f Pakistan (TCP) procures cotton, and minimum cotton export prices are announced
Li vestock and agricultural GDP growth in the 199Os, though substantial, are overstated because
In value terms, r i ce productivity in Pakistan exceeds that o f India since a higher share o f Pakistans production
derives from hgh-value basmati r i ce.
Al i and Byerlee, (2002), Table 2, p. 847.
7
dai l y whi ch effecti vel y act as cei l i ng prices. Market prices f el l substantially bel ow support prices in 1999
and 2001, however. The TCP also exports rice, sugar and wheat.
Table 2.3 Ratio of Wholesale Prices (Lahore) to Support Prices, 1995-96 to 2001-02
Basmati IRRl Sugar
Wheat Rice Rice Cane
1995-96 1.16 1.46 1.74 1.19
1996-97 0.99 1.59 1.99 1.48
1997-98 1.25 1.28 1.54 0.83
1998-99 1.14 1.67 1.55 0.82
1999-00 0.98 1.47 1.69 0.90
2000-01 1.07 1.01 1.13 1.20
2001-02 1.03 1.47 1.28 0.85
Average 1.09 1.42 1.56 1.04
Notes: Missing data f or wheat prices f r om January-April 1999 i s interpolated. Support pri ce of basmati
and IRRI paddy i s converted t o ri ce equivalent using a mi l l i ng rati o o f 0.67.
Source: Agri cul ture Statistics of Pakistan (200 1-02)
Figure 2.1 Wheat Prices in Pakistan, 1995-2003
18.0 I 1
16.0
14.0
12.0
10.0
8.0
6.0
4.0
1 -Wholesale Price (Lahore) +i+ Procurement Price + Import Parity Lahore 1
Source: Calculated from Federal Bureau of Statistics data and M. Ahmad (2003).
2.12. Up until the mid-l980s, negative indirect effects of overall trade and exchange rate policy
exacerbated the effects of agricultural domestic price interventions, and most major agricultural
commodities were implicitly taxed. In the 1983-87 period, direct effects o f domestic pri ce and trade
policies reduced wheat and basmati ri ce prices by an average o f 25 and 72 percent, respectively, bel ow
border prices, The indirect effects o f trade and exchange rate policies that l ed to an appreciation o f the
8
real exchange rate further reduced theses prices to an average o f 42 and 78 percent bel ow border prices.
For cotton, this real exchange rate appreciation reduced the protection afforded to domestic cotton
producti on f r om 177 percent down t o 27 percent. These price disincentives reduced wheat and r i ce
producti on by an estimated 24 and 25 percent (relative to what they woul d have been during this period),
and reduced f ar m incomes by an estimated 29 percent (Dorosh and Valdes, 1990).8
2.13. As a result of policy reforms, divergences between domestic and international prices of
major agricultural products are much smaller now than in the mid-1980s (figure 2.2). Wheat
support prices were on average onl y 10 percent bel ow i mport pari ty levels (measured at procurement
centers) in 1999-00 and though prices since then have been bel ow i mport pari ty levels, wheat i mport
demand by Pakistan at wor l d prices was essentially zero, (so that wheat was essentially a non-traded
good).g Support prices for basmati ri ce were on average 22 percent bel ow border prices (measured at
procurement centers); IRRI ri ce prices were on average 15 percent above border prices. Cotton prices
were within 5 percent o f estimated export pari ty in 2000-01 and 2001-02. Moreover, trade and exchange
rate reforms since the late 1980s have t o a large extent eliminated maj or trade and forei gn exchange
restrictions and greatly reduced the appreciation o f the real exchange rate relative t o i t s medi um term
equi l i bri um levels.
Figure 2.2 Nominal Rates of Protection of Major Crops
0.40
0.30
0.20
0.10
0.00
-0.10
-0.20
-0.30
-0.40
-0.50
B3.I 1999-00
2000-01
0 2001 -02
Source: Based on calculations in M. Ahmad (2003).
2.14.
reduce market efficiencies remain, however. Econometric evidence suggests that wholesale wheat
prices in village markets are determined by the procurement pri ce and the distance o f the vi l l age t o the
procurement center (Kurosaki, 1996), but movement o f grai n across district boundaries has been banned
f or a few months after the wheat harvest in some recent years. Rent seeking activities occur, in markets
with and wi thout government intervention, as wel l . In mango markets in the Sindh, rents are i nvol ved in
Some informal and formal restrictions on internal markets that raise transactions costs and
Hamid, Nabi and Nasi m (1990) gi ve si mi l ar figures f or nomi nal rates o f protection, as wel l as a detailed account
o f the pol i cy interventions f r om 1960 t o the mid-1980s.
In 2001, the GOP provi ded a subsidy o n wheat exports that totaled about $1 mi l l i on. In 2002-03, the wheat export
subsidy on wheat was Rs 3250/ton, equivalent t o 30 percent o f the estimated C&F pri ce o f U S wheat at Karachi .
9
~
lrriga tion Credit Electricity Total
1996-97 4,550 1,000 604 6,154
1997-98 5,111 83 972 6,166
1998-99 4,237 437 1,336 6,010
1999-00 4,608 279 652 5,539
Average 4,627 450 89 1 5,967
the collection o f market fees, issuance o f trader licenses, and allotment o f shops (Smith, Khushk, and
Stockbridge, 1999).
2.15. There have been n o direct subsidies on pesticides, seeds and fertilizer since 1996, but subsidies
on surface i rri gati on water and electricity (in Baluchistan only) remain. The pesticide and seed subsidies
were eliminated in 1981-82 and 1982-83, respectively. The subsidy on l ocal l y produced fertilizer was
eliminated in 1993; a small subsidy on i mported fertilizer was eliminated in 1996." Likewise, a subsidy
on tube wel l s o f Rs 16,000 t o 20,000 per unit was abolished in 1994-95. Subsidies o n canal i rri gati on
(calculated as the difference between revenues collected f r om farmers as water charges and the cost
incurred by the government for operation and maintenance, excluding capital costs) averaged Rs 4.6
bi l l i on f r om 1996-97 to 1999-00, equivalent to 0.8 percent o f agricultural GDP (table 2.4).
Table 2.4 Subsidies in Pakistan Agriculture: 1996-97 to 1999-00 (mn Rs)
Source: M. Ahmad (2003); Statistical Supplement (2002b);
Pakistan notifications to the WTO.
lo Al l fertilizers now face a 15 percent sales duty, and i mported fertilizers also face a 5 percent custom duty.
10
111. RURAL LAND MARKETS: INSTITUTIONS AND CONSTRAINTS
3.1 Land, parti cul arl y irrigated land, i s the most important productive asset in r ur al Pakistan and a
maj or determinant of social status, pol i ti cal influence and income. Land ownership provides access t o
pol i ti cal power and publ i c incomes for large landowners, and has considerable pecuniary and non
pecuniary, often invisible, associated returns. An effective l and market has failed t o develop because o f
l egal impediments t o the sale and purchase o f l and such as the right o f shufa ( f i r st purchase) and
excessive bureaucratic intervention. While the market for l and rental i s somewhat more developed,
inadequate i nformati on f l ow and other ri gi di ti es (including l ack o f access to credit) are responsible f or an
economically and socially sub-optimal allocation o f this basic resource.
Land Ownership and Utilization
3.2
mai nl y t o increases in water availability at the farm level. Most o f this gain in area cultivated was
achieved pr i or t o 1990; between 1990/91 and 2000/0 1, cultivated area increased by onl y 3.2 percent, f r om
20.96 t o 22.13 mi l l i on hectares, as cropping intensity increased f r om 1.35 to 1.43 (table 3.1).
Cul ti vated area in Pakistan has increased by about 50 percent since Independence in 1948 due
Table 3.1 Land Use in Pakistan, 1990-91 and 2000-01
7990-97 2000-07
Forest Area 3.46 3.77
(6.0) (6.3)
Not Available for Cultivation 24.34 24.31
(42.2) (40.0)
Culturable Waste 8.85 8.95
Cultivated Area 20.96 22.27
(36.4) (37.2)
a. Net Area Sown 16.1 1 15.4
(28.0) (25.9)
b. Current Fallow 4.85 6.73
(1 5.4) (1 5.4)
(8.4) (1 1.3)
Total Cropped Area 21.82 22.12
(37.9) (37.1)
Total Area 57.61 59.44
(100.0) (1 00.0)
a. Net Area Sown 16.1 1 15.4
b. Area Sown More than once 5.71 6.64
c. Cropping Intensity 1.35 1.43
Note: Figures in parentheses are the percentages o f t ot al reported area.
Source: Agri cul tural Census (1990 and 2000).
3.3 Di stri buti on o f owned l and in Pakistan i s highly skewed and the number o f small farms i s
increasing over time. Accordi ng to Agri cul tural Census data for 1990, 54.4 percent o f farm households
owned less than 5 acres (accounting for onl y 11.4 percent o f total area), whi l e 2.8 percent o f households
owned 50 acres or more (accounting for 34.0 percent o f total land). By 2000,61.2 percent o f f ar m
11
households owned less than 5 acres o f land, (accounting for 14.8 percent o f total f ar m area), and 2.0
percent farmers owned 50 or more acres, but these farms accounted for 29.7 percent o f total area.
3.4
percent o f rural households with no land, the al l Pakistan Gini coefficient i s 0.86. By comparison, Gini
coefficients for l and ownership are 0.71 (NSS, 1991-92) for Indi a as whole" (0.76 for Punjab, 0.63 in
Ut t ar Pradesh), 0.42 in Bangladesh, 0.37 in Thailand, 0.85 in Brazil.12 In spite o f the increase in the
number o f small farms, the overall Gini coefficient for l and ownership in Pakistan remained
approximately constant f r om 1972 t o 2000 (table 3.2).
The overall Gini coefficient o f land-holdings in 2000 in Pakistan was 0.66. Incl udi ng the 63
Table 3.2 Pakistan: Distribution of Land Ownership
1972 1980 I990 2000
Gini Coefficient 0.66 0.65 0.66 0.66
% of landless households
62.0 63.3
% Share of Holdings <5 acres
a. Households
b. Land
% Share of Holdings 50+ acres
a. Households
b. Land
47.3 n.a. 54.4 61.2
5.4 n.a. 11.4 14.8
3.3 n.a. 2.8 2.0
22.4 n.a. 34.0 29.7
Source: Agr i cul t ur e Census (vari ous issues)
3.5
and 2000. The Gini coefficient for Punjab remained almost constant at about 0.62. Inequal i ty in Sindh
declined f i om 1972 (Gini coefficient o f 0.69) t o 1980 (Gini coefficient o f 0.62), but has remained the
same since then. In Balochistan, the Gini coefficient declined slightly f r om 0.70 in 1990 t o 0.66 in 2000,
i ndi cati ng an increased equality o f l and distribution (table 3.3).
Similarly, inequality o f l and hol di ng within provinces did not change significantly between 1972
Table 3.3 Gini Coefficient for Ownership Holdings by Province
1972 1980 1990 2000
Punj ab 0.63 0.62 0.62 0.62
NWFP 0.68 0.69 0.65 0.70
Sindh 0.69 0.63 0.63 0.63
Bal ochi st an 0.69 0.68 0.70 0.66
Source: Agri cul tural Census (Various Issues)
0.59 (1985 FA0 data).
l2 These l and ownership data l i kel y understate the concentration of land-holdings in Pakistan (and other countries)
since a household's l and may be registered in the names o f several household members.
12
3.6
data, in 2001-02 less than 0.2 percent o f total agricultural l and was ~ 0 l d . l ~ Over time, however, l and
prices have ri sen substantially relative to l and rents, maki ng l and l ess accessible for landless and smal l
holders since agricultural incomes f r om purchased l and may be i nsuffi ci ent t o repay money borrowed for
a l and purchase, even if credit were available (See Box 3.1).
Land sales markets in Pakistan are extremely thi n: according t o Pakistan Rur al Household Survey
Box 3.1 Land Price Determination in Pakistan: Land Rents and Asset Effects
Conventional rent theory suggests that the pri ce o f l and i s determined by the discounted value o f the
lands potential earnings (rents). Data on long-term trends in rental values and l and prices in col oni al
and post-independence Punjab show a l ong term decline in the rental value o f l and relative t o the pri ce
o f land, suggesting that agricultural earnings are not the mai n determinant o f l and prices (Hirashima,
1996). Instead, asset effects, l i kel y l i nked to the use o f l and as a symbol o f prestige and power, and
private capital formati on in non-agricultural sectors, appear to be the maj or determinant o f l and prices
in Punjab in the l ong run.
During periods o f maj or technological change (the peak o f the green revolution, 1976-86), however,
rents rose faster than l and prices in rural Punjab villages. Nonetheless, f r om 1960 t o 1989, the rati o o f
annual rent to l and asset pri ce (the WP ratio) declined f r om 3.93 percent to 2.59 percent in the i rri gated
villages and from 2.85 percent in 1960 to 1.98 percent in 1989 in non-irrigated villages (Renkow,
1991).
The large asset component in l and prices makes i t very di ffi cul t f or landless households to purchase
land, High l and prices increase the financial capital required, and l o w returns t o l and relative to these
l and prices mean that agricultural incomes alone may be i nsuffi ci ent t o repay money borrowed for a
l and purchase. Only those who can afford t o wai t for the asset effects t o be captured in the long-run,
wi thout expecting much return in the short-run, can participate in l and market. In this situation, the
income f r om outside the agricultural sector (including through remittances) are needed for most
landless or small farm households t o purchase land. Moreover, because increases in l and prices f r om
asset value effects vary according to the l evel o f infrastructure and the dynamism o f the l ocal rural non-
farm economy, uneven regional economic growth i s l i kel y t o increase weal th disparities across farmers
in Pakistan.
Source: Hirashima, 1996 ; Renkow, 1991 ; Qureshi, 2003.
3.7 Land rentals are much more common than l and sales, but s t i l l account for a relatively small share
of area cultivated. In 2000, 78 percent o f farms in Pakistan, accounting f or 73 percent o f area cultivated,
were cultivated solely by the owners o f the land. Fourteen percent of farms, with 12 percent o f total area
cultivated, were cultivated solely by tenants. The remai ni ng 8 percent o f farms (with 15 percent o f area
cultivated) were farms consisting o f bot h owned and rented-in l and (figure 3.1). Tenancy i s decl i ni ng in
Pahstan, however, between 1990 and 2000 the percentage o f farms with at least some rented-in l and f el l
from 3 1 percent to 22 percent.
3.8
share-cropping arrangements where the l andl ord i s responsible f or most input costs (such as seed,
Accordi ng to the 2000 Agri cul tural Census, about two-thi rds o f tenant-cultivated farms i nvol ve
l3 Pakistan Rural Household Survey (PRHS) 2001-02. By comparison, annual tumovers o f land in Lat i n American
are often 10 to 20 times larger, averaging 5 percent in Colombia, 2 to 3.5 percent in Venezuela, and 1.4 to 2 percent
in Ecuador (Jaramillo 2001). In contrast, no formal land sales markets in Cambodia, China and the Lao Peoples
Democratic Republic, where the state or the collective sti l l owns the land.
13
ferti l i zer and pesticides), the tenants share in some other expenditures (such as water and rental o f
machinery), and the output i s shared equally between l andl ord and tenant. Most o f the remai ni ng one-
third o f tenant-cultivated farms i nvol ve fixed rents pai d in cash.
Figure 3.1 Pakistan: Percentage of Farms and Area Cultivated by Land Tenure Status
90
80
70
60
3 50
2 40
30
20
10
0
S
0
Owners OwnlRent Tenant
1 % of Farms E % of Area
Source: 2000 Agricultural Census.
3.9
11.4 percent o f f ar m area in Balochistan to 17.2 percent o f farm area in Sindh. Al though share-cropping
declined from 1990 t o 2000, the relative importance o f share-cropping across provinces has not changed.
There i s substantial variance in the incidence o f share-cropping across provinces, rangi ng f r om
3.10 The distribution o f operational holdings i s nearly as skewed as distribution o f l and ownership. In
2000, 58 percent o f farms in Pakistan were smaller than 5 acres in size. These farms occupy 16 percent o f
total f ar m area. In contrast, onl y 5 percent farms were 25 acres and above and total area under these farms
was 38 percent in 2000 (table 3.4). Trends in distribution o f l and cultivated are l i kewi se similar t o those
of l and ownership, The number o f small farms (under 5 acres) has increased f r om 46 percent in 1960 to
58 percent in 2000. Area under these farms has also increased considerably - f r om 3 percent in 1960 t o 16
percent in 2000. The number o f farms in al l other f ar m category shows a decline since 1960, except f or
the medi um farms (5 t o 12.5 acres).
Table 3.4 Pakistan: Distribution of Farms and Area by Farm Size (operated area)
Source: Agriculture Census (various issues)
14
3.1 1
in the NWFP and Baluchistan. Over the past three decades, however, the differences across provinces
have narrowed, as distribution in Sindh and Punjab have worsened, rising f r om 0.43 and 0.49,
respectively in 1972 to 0.56 and 0.57, respectively in 2000. Over this period, the gini coefficients for
operated l and area have remained almost constant in the NWFP and Balochistan, varyi ng between 0.63
and 0.65.
Across provinces o f Pakistan, bot h owned l and and operated l and are most unequally distributed
Land Distribution, Land Policy and Land Reform
3.12
r ul e and successive governments o f independent Pakistan. As part o f i t s strategy t o win friends amongst
enemies, l and rights were granted t o rural elites as a reward for cooperation and t o encourage future
assistance (Naqvi et. al., 1987).14 Land policies varied over ti me and across province, and i ncl uded four
concurrent maj or l and administration systems pr i or t o independence -- i ncl udi ng the zamindari (landlord
tenant), ryotwari (peasant proprietorship) systems, that established or encouraged an unequal distribution
o f l and (Box 3.2).
The current distribution o f l and in Pakistan reflects the government l and pol i ci es under British
Land Reforms
3.13
fol l owed by three national l and r ef or m acts (1959, 1972, 1977). Implementation o f these reforms was
weak, however, due in part to a general l ack o f pol i ti cal wi l l and insufficient pol i ti cal strength o f tenants
t o counter the opposition by landlords (Box 3.3).
3.14
8 percent o f the countrys cultivated area) f r om large landowners. About 1.3 mi l l i on hectares was
redistributed to about 280,000 beneficiaries (an average o f 4.6 hectares per beneficiary). Much o f this
redistributed l and was not o f high quality, however, (less than three-quarters o f the distributed area was
under cultivation). Not al l beneficiaries were sharecroppers: a high proporti on o f recipients were already
small-landowners.
Af t er Independence in 1947, various tenancy acts were passed in Punjab and Sindh in 1950,
Under the 1959 and 1972 l and r ef or m acts,15 the government acquired 1.6 mi l l i on hectares (about
3.15
agenda o f policy-makers in Pakistan. The Shariat Court has gi ven a ruling that i mposi ng a cei l i ng on l and
ownership i s in accordance with Islam, and that the l and r ef or m acts must be rescinded. The Government
o f Pakistan has appealed this ruling, and the case i s st i l l pending.
Despite continuing high levels o f l and concentration, further l and reforms are currently o f f the
l4 Naqvi N.H., Khan M.H. and Chaudhury M.G. (1987) Land Reforms in Pakistan: A Hi st ori cal Perspective,
PIDE, Islamabad
The 1977 l and ref orm act was never implemented.
15
Box 3.2 Historical Rural Land Tenure Systems in Pakistan
Bot h the British and the Mogul s before them granted large rent-free tracts o f l and called j agi rs t o
individuals who had helped them in conquering parts o f Pakistan. In the Sindh, jagirdars often collected part
af the produce f r om occupancy tenants, i.e. tenants who had permanent, heritable and transferable rights t o
Eultivate the lands.' In many areas these occupancy tenants, called Mukhadims, did not cultivate the l and
themselves but engaged tenants-at-will (tenants wi t h few, if any, l egal rights, i ncl udi ng occupancy rights),
called haris.
Si mi l ar t o the j agi rdari system o f l and administration, the Pattadari system was operated in the nort hem
parts of Sukkur and Shikarpur districts in the Sindh for Af ghan settlers. These settlers col l ecti vel y pai d a
nomi nal rent t o the government, but an unequal distribution o f l and holdings prevailed among i ndi vi dual s as
these were based o n ancestral and customary rights.
The British offi ci al s also recognized the proprietary rights o f landlords (zamindars) who had acquired large
estates during the per i od o f pol i ti cal instability i mmedi atel y before the extension o f Br i t i sh rul e t o the Punjab
and other areas constituting present-day Pakistan. The construction o f the Sukkur Barrage in 1932 and
perennial canals in the f ol l owi ng years, much o f the newly i rri gated l and was purchased by zamindars at high
prices and subsequently rented out to poor cultivators.
In Sindh, the British introduced the ryot wari system, under whi ch the state kept the proprietary rights t o the
l and and leased the l and t o tenants who pai d l and revenues onl y f or the years they pl oughed the fields.
Likewise, the Mahal wari system (a refinement o f the ryot wari system) was established in the eastern part o f
the Punjab, by whi ch the peasants o f a village were responsible col l ecti vel y and i ndi vi dual l y f or the payment
o f l and revenue t o the British.
Ownership
& System Region Ri hts
Mahalwari
Eastern Punjab
Jagirdari Punjab, Sindh
Zamindari Pakistan
Ryotwari Pakistan
Pattadari Sindh
Individual
Individual
State
State
State
Peasants responsible individually and collectively for payment
of land revenue to British
Tax-free tracts of land allocated to favored individuals
Occupancy-tenants (Mukhadims) with permanent, heritable
Mukhadims engaged tenants-at-will with few, if any legal rights
and transferable rights
Large landlord-holdings with heritable, divisible and transferable
rights provided land revenues were paid to State
Peasant-holdings with heritable, divisible and transferable
rights provided land revenues were paid to State
Nominal rent paid to State by Afghan settlers collectively;
unequal distribution of land holdings based on ancestral
Source: Based on Qureshi, Sarfraz. 2003. Rural Land Markets in Pakistan: Institutions and Constraints.
Background paper for Pakistan Rural Factor Markets Study.
16
Box 3.3 Land Policies and Land Reform in Pakistan
Numerous land policies have been enacted in Pakistan si nce 1947, both at the provincial and federal l evel
The Punjab Tenancy Acts (1887 to 1950) included several important provisions limiting land ownership and
conditions o f tenancy:
i) A landlord holding more than 100 acres was to keep only 50 acres for cultivating land himself and
the rest o f the land owned by him was to be given to the tenants.
ii) The landlords share of the produce was fi xed at 40 percent and he was to pay government dues in
the same proportion.
iii) All Jagirs were abolished except mi l i tary Jagirs and those connected with religious and charitable
institutions.
iv) Tenants could be ejected only if they failed to pay tax in time, did not cultivate the land, or the
landlord wanted the land for his own cultivation.
v) Occupancy tenancy was abolished and the creation o f new tenants was prohibited.
I n 1950, the Sindh Tenancy Act gave permanent rights to the tenants (Hark) who had cultivated at least four
acres of land continuously for three years. I t abolished Beaar (free services) and various illegal charges.
Under the 1959 Land Reform enacted under Marti al Law, i) ceilings on holdings were fi xed at 500 acres o f
irrigated land and 1000 acres of un-irrigated land; ii) tenants had the f i r st claim to purchase the land resumed
by the government; iii) landlords were given compensation through interest -bearing bonds; iv) jagirdari o f al l
types was abolished without compensation; v) security o f tenure o f tenants was guaranteed; and vi) division o f
land i nto uneconomic holdings was prohibited. In addition, a pl an for consolidation of holdings was adopted, a
comprehensive pl an for land utilization was formulated, and credit facilities were envisaged for the new
landowners.
I n 1972, more radical land reforms (under MLR-115) included the following provisions: i) the cei l i ng on
land ownership was reduced from 500 acres o f irrigated land to 150 acres and from 1000 acres o f unirrigated
land to 300 acres; ii) land owned above the permissible limit was to be surrendered to the government without
compensation; iii) al l the resumed land was to be distributed among the ti l l ers free o f cost; iv) Shikaraahs
(hunting grounds), except those already owned by government, were to be resumed; v) land over 100 acres
acquired by a government servant during his t er m in office or two years after his retirement was to be
confiscated; vi) al l state land was to be given to landless cultivators or those having smaller than subsistence
holdings on easy installments; vii) tenants could be ejected only if they failed to give the crop share or rent;
and viii) the water rate and cost of seed was to be pai d by the landlord.
The 1977 land reforms were designed to be even more stringent in terms o f the ceilings on land ownership.
However, these were never implemented due to opposition by large land owners.
Land Administration, Land Titles and Contract Enforcement
3.16 Pakistan has an elaborate system o f l and administration inherited f r om the British, i nvol vi ng the
establishment of rules and regulation regarding sale, purchase and use o f l and resources and the col l ecti on
of l and tax. This system has decayed in many respects due t o inadequate resource allocation f or routi ne
l and administration, and the additional administrative burdens o f development wor k placed on revenue
officials after independence in 1947.
3.17
and not t o provi de conclusive titles t o land. As a result, neither the agrarian laws for provi di ng titles t o
l and nor the actual l and records provi de a firm foundation f or effi ci ent l and markets or secure l and tenure.
Instead, the ambiguity in laws has l ed t o incessant l i ti gati on and cl oggi ng o f the j udi ci al machi nery in the
country.
The original pri mary intent o f agrarian l aws in Pakistan was t o facilitate col l ecti on o f l and taxes
17
3.18
prevai l i ng during the British period. Under those laws, the King o f England was the eventual proprietor o f
al l lands. The rights of any i ndi vi dual t o have any kind o f right for the l and were subject t o payment to
him o f l and revenue unless a special waiver was granted f r om the payment o f l and revenues as for
j agirdars
The agrarian l aws in Pakistan dealing with l and administration are patterned on the l aws
3.19
Revenue Act, 1967, whi ch unified the provisions o f the Bombay (Sindh) Land Revenue Code, 1879, and
the Punjab Land Revenue Act, 1887. Sections 42-45 o f this uni fi ed Act enumerate the rights ( of
landowners), and al l l and sales or transfers o f l and are required t o be recorded in the records-of-rights
according t o specified procedures. Section 52 o f the Act attaches the presumption o f correctness t o the
records-of-rights prepared at the ti me o f the settlement, as also to any entry made in the records-of-rights
or in the periodical records in accordance with the provisions l ai d down in sections 42-45 and the rules
there under.
The maj or legal provisions related to l and in Pakistan were codified in the West Pakistan Land
3.20 The present l aw does not profess t o provi de for a State certificate o f ti tl e t o l and under the aegis
of a publ i c authority. The records-of-rights and other documents based on the l and records, by vi rtue o f
provisions in the l and laws are presumed to be accurate. These entries onl y provi de presumptive status o f
rights under l and laws. Many court rulings have also maintained that entries in the l and records are not
sacrosanct, that the revenue records are not the documents o f title, and that it i s permissible t o challenge
the entries for determining the ti tl e t o land.I8 This gap in the l aw has been the basis o f l i ti gati on in l and
ma t t e r ~. ~
3.21 Preparation, maintenance and updating o f l and records in Pakistan are administered at the
provi nci al l evel by a Board o f Revenue, whi ch i s responsible for pol i cy matters, and i s the ul ti mate forum
for the fi nal appeal o f al l l and disputes. The Board also organizes full-scale settlement operations for the
periodic updating o f l and records. At the district and sub-district levels, Directorates o f Land Records and
field-level l and management offi ci al s (tehsildurs and putwaris) under the Di stri ct Coordi nati on Offi cer
(DCO) are responsible for bot h maintenance and continuous updating o f l and records.20 These basic l and
records at the fi el d l evel consist of: i) the record o f ri ghtdperi odi cal record (along with the pedigree table
of the owners); ii) the Register o f Mutations; iii) The Register o f Crop Inspections (Register Girduwari);
and iv) the Cadastral Map (Shujru Kishtwur).
l6 The Governments o f Punjab and NWFP enacted legislation t o abolish Jugirs in 1950, but a si mi l ar acti on o f the
Si ndh government was successfully challenged in the Hi gh Court in 1955.
l7 Since the Land Revenue Act was uni f i ed in 1967, the l and revenue acts in al l provinces are identical. There are,
however, mi nor variations in the administrative set-up o f the provinces f or l and management.
* The Lahore High Court ( PLD 1966) hel d that entries in revenue record are not sacrosanct. They are certainly an
important piece o f evidence but l i ke al l other evidence they can be countered.
l 9 The Registration Act, 1908, (the model Ac t on whi ch the present Ac t in Pakistan i s based), provi des f or the
registration o f documents but not f or the registration of titles. Registration o f documents i s compul sory onl y where
some provi si on in the Transfer o f Property Ac t (for example, Section 543 in the case o f an outri ght sale o f an
i mmovabl e property) or some provi si on in the Registration Act (for example, Section 17 dealing with various
transactions concerning i mmovabl e property) provides f or compulsory registration. In al l other cases, unless
provi ded by a special law, registration o f documents i s optional, parti cul arl y in the case o f wills. The registering
officer i s not supposed t o concern hi msel f with the val i di t y o f the document.
2o The central survey and settlement organizations (within the Boards o f Revenue ) and the directorates o f l and
records are a small setup with the mai n mandate o f conducting trai ni ng and provi di ng technical advice t o f i el d
officials and provi di ng support t o the Boar d o f Revenue.
18
3.22 Contract enforcement o f l and rental contracts result in numerous l egal disputes over i l l egal
possession o f land, restoration o f tenancy, incorporation o f transfer o f property (by oral transactions,
registered sale deeds, or decree o f the court) in the revenue record, eviction o f tenants, l and leases and
grants, (particularly o f l and j oi nt l y owned), and recovery o f rent. Al though the Revenue courts have a
l egal mandate t o adjudicate l and disputes, many o f these cases are heard in ci vi l courts.21 In general, smal l
l and holders and tenants, tend to prefer to come t o the revenue courts, however, because these courts are
more accessible, cheaper and less ti me - consuming than the ci vi l courts. Nonetheless, there i s a
widespread perception that implementation and enforcement of decisions o f revenue courts are often
biased in favor o f l arge and powerful l and owners.
3.23 The ambi gui ty o f agrarian l aw regarding records o f l and rights i s particularly harmful t o poor,
who cannot afford protracted l and disputes. The insecurity o f l and tenure also serves as a disincentive f or
investment, reduci ng growth o f the agricultural sector. Unambiguous and authoritative laws, together
with an effective l and recording system, woul d promote the smooth transfer o f titles and an effi ci ent l and
market (Box 3.4).
Box 3.4: Land Rights in Punjab and Sindh
In Punjab, oral mutation has led to fraudulent transactions entered in the Register o f Mutations by the
patwari and hence to serious disputes in rural areas. Accordingly, the relevant sections o f the Transfer o f
Property Act, 1882, were amended. However, the ol d system of oral mutation was revived in 1978 under
pressure from vested i nterest groups.
According to the Punjab Land Revenue Act, 1967 and the Punjab Tenancy Act, 1887, the jurisdiction o f
the ci vi l courts i s barred in revenue cases, but the ci vi l courts may take cognizance in disputes related to ti tl e.
The common causes o f dispute are the demarcation o f boundaries, recovery o f rent, restoration o f tenancy,
eviction of tenants, land leases and inheritance disputes. According to the Muslim l aw of inheritance,
daughters, sisters, mothers, grandmother are also entitled to i nheri t property, but in the agricultural
community there i s a tendency to deprive them o f their share o f inheritance. Women have become more
aware o f their rights now because o f an increase in education and general awareness.
In Sindh, any person who acquires a right in the property has to report orally or in writing the nature o f his
right to the specially set up cel l at Taluka (sub-district) l evel within three months. The Mukhtiarkar makes
necessary corrections wi thi n 15 days. If objections are received, the Mukhtiarkar in an open katchery disposes
these of, There are serious defects in the system o f maintenance o f Records o f Rights in Sind. Most
importantly, there are cases of corruption, public harassment and inefficiency. Moreover, the Mukhtiarkar or
other officials manning the Taluka cells, may not be available for either receiving statements or for hearing
objections, given their busy schedule and pre-occupation wi t h many other administrative tasks.
Source: Qureshi, Sarfraz. 2003.
21 Under the new system of devolution introduced by the present government, the functioning of the Revenue
courts remains much the same as before, with the work of Deputy Commissioner, Assistant Commissioner and
Commissioner now transferred to Di stri ct Officer (DO) (Revenue), Deputy District Officer (DDO), and Executive
District Officers [EDO] (Revenue). The Land Revenue Laws and operational capacity of the revenue courts remain
the same, however.
19
Patterns of Land Use and Productivity by Far m Size and Tenure Status
3.24
with producti vi ty has been the subject of considerable debate in Pakistan. Economies o f scale (especially
with regard t o mechanization), l ess aversion t o risk, and better access to credit, purchased inputs,
extension services and markets coul d potentially make large farms more productive than smal l farms. But
more intensive use of own fami l y labor and l ower management costs per unit o f area farmed coul d result
in an inverse relationship between farm size and producti vi ty. For farms o f equal size, owner-operated
farms might be expected to be more productive than tenant-operated farms, because o f thei r rel ati vel y
greater incentives to invest in l and and tube wel l s whi ch they themselves own. Moreover, under share-
croppi ng arrangements where the costs o f some inputs are borne by the tenant, a profi t-maxi mi zi ng tenant
wi l l use l ess inputs and produce l ess output per hectare than he woul d i f owned the l and (or pai d a fi xed
rental amount).*
Size o f f ar m and tenure status have clear implications for farm incomes, but their relationship
3.25
for very small farms (less than 0.5 hectares) (See table 3.5). Wheat i s the predominant crop across al l
farm sizes, accounting for 36 t o 43 percent o f area. Among the maj or field crops, onl y f or mai ze and
fodders, and to a lesser extent, ri ce and cotton, do cropping patterns vary significantly by f ar m size.
Mai ze i s the second most important crop (accounting for 21 percent o f area cultivated) for the smallest
farms (less than 0.5 hectares), but accounts f or an average o f onl y 4 percent o f area cultivated o f al l farms.
By contrast, the share o f ri ce and cotton in total area cultivated o f very small farms (5 and 6 percent,
respectively, in 2000) i s less than hal f the average area cultivated for farms o f al l sizes (12 and 14 percent,
respectively). These differences t o a large extent reflect distribution o f irrigated l and in the mai n areas o f
cul ti vati on o f these crops. Similarly, vegetables and orchards occupy a significantly larger proporti on o f
the cultivated acreage o f the largest farms than o f the smallest farms. Agri cul tural Census data show no
distinct patterns across tenurial status in t er ms o f the crops grown, however.
3.26
suggests that small farms are more productive in terms o f net revenue per unit of l and cultivated than are
larger farms, particularly on irrigated land. Far m incomes per cultivated area o f farms l ess than 5.0 acres
in size in the parti al barani zone (dependent on rai nfal l and wel l s f or water) and the i rri gated zone (with
canal, wel l and r ai n water) were 3.1 and 1.6 times f ar m incomes per cultivated area o f farms greater than
25 acres in the respective zones. There are onl y small differences in incomes across f ar m size in barani
(rainfed) zones, however, and the estimated differences in i ncome per acre among farms greater than 5
acres i s onl y 8 t o 16 percent in irrigated zones (figure 3 -2).
Accordi ng t o agricultural census data, cropping patterns vary l i ttl e by farm size and tenure, except
Data on farm incomez3 per cultivated area across ago-cl i mati c regi on in the Punjab f or 2000/0 1
22 See Nabi , Hami d and Zahi d (1986) f or a detailed discussion of f ar m size and productivity, and economic
incentives under tenancy.
23 Far m i ncome includes bot h crop and livestock income.
20
Figure 3.2: Pakistan: Farm Income per Cultivated Area in Punjab, 2000/01
35,000
30,000
25,000
20,000
Q, 15,000
$
a 10,000
u)
0
Q
5,000
Barani Partial Irrigated Average
Barani
Less than 5
5 to 12.5
0 12.5 to 25
D25andabove
Source; PEN (2001)
Note; (1) Barani zone consists o f four districts o f Punjab namel y Attock, Rawalpindi,
Chakwal and Jehl um districts.
(2) Partial Baranythal zone: consists o f Gujarat, Gujranwala, Sialkot,
Sheikhupura, Mandi Bhaudin, Lahore, Narowal, Kasur and Hafi zabad districts.
(3) Irri gated area: consists o f remai ni ng 25 districts in the provi nce o f Punjab.
N
N
9.
b N b N m i
3
N N
m'
N
n
0
0
0
(d
B
v
22
3.27
scale in physi cal production (table 3.6). Plot-level regressions o f productivity, correcting f or pl ot
characteristics and some household characteristics (such as tractor ownership and number o f
household workers) suggests a doubling o f operated area leads t o 10 percent l ower wheat yields
(and 13 percent l ower ri ce yields), (Worl d Bank, 2002). Similarly, control l i ng for access t o
credit, Jacoby and Mansuri (2004b) find that a doubl i ng o f pl ot area leads t o a 12 percent
reducti on in gross producti vi ty (controlling here for access to credit).
However, most recent econometric evidence suggests relatively small diseconomies o f
3.28 Estimates o f scale effects on net revenue per acre (Le. gross revenue less the value o f
inputs) di ffer widely though. Wor l d Bank (2002) estimates that a 100 percent increase in pl ot
area results in a 22 percent reduction in khar i f season and 38 percent in rabi season net revenues.
In contrast, correcting for l and owned, Anri quez and Valdes (2004) find an overall elasticity o f
net revenues with respect t o total operational size o f a farm o f 0.33. In theory, if l and rental
markets worked efficiently, l and rental rates woul d equal margi nal returns to land, and net
revenues woul d exhibit constant returns t o scale.
3.29
croppers who are relatively u n ~u p e r v i s e d ~~ i s 18 percent less than producti vi ty o f supervised
share-croppers and farmers who cultivate their own land. Since onl y 19 percent o f l and in
Pakistan i s share-cropped, and an estimated 35 percent of tenants are rel ati vel y unsupervised,
unsupervised tenants account for onl y about 7 percent o f total area cultivated and the effect on
total producti on o f maj or crops i s small: onl y 1.4 percent (Jacoby and Mansuri, 2004a).
Econometric evidence on the effects of tenancy suggest that the producti vi ty o f share-
3.30
through disincentives on long-term investments by the tenant in l and quality. Econometric
analysis o f PRHS 2001-02 data, (Jacoby and Mansuri, 2003), shows that farmers used less
manure on leased plots than on their own plots, reduci ng yields by about one percent in the f i r st
year and a cumulative total o f 2-2.5 percent in future years.26 These effects on yields are
rel ati vel y small, but disincentive effects o f tenancy contracts may be larger for investments in
canal lining and tube wells.
Lack o f secure tenancy arrangements also has negative implications for producti vi ty
24 In this study, tenants were considered t o be unsupervised, if during the cropping season there were less
than ten meetings between the tenant and l andl ord t o discuss management o f the pl ot.
25 Share-cropping arrangements benefit share-croppers by enabling t hem t o share the risk o f output
fluctuations with the landlord, and also t o share the costs o f purchased inputs. However, they provi de less
incentives f or labor input by the tenant, since the output i s shared, as well.
26 Appl i cati on o f manure increases yields, by provi di ng addi ti onal soi l nutrients and by i mpr ovi ng soi l
structure, aeration, water retention, and abi l i t y t o retai n nutrients.
a
E:
ed
m
c.l
cl
8
IV. WATER MARKETS IN PAKISTAN AGRICULTURE
4.1
year, though with large year-to-year fluctuations. Large-scale movements o f water f r om one l ocati on to
another take pl ace through the extensive Indus basin canal system in Pakistan, notwithstanding
substantial conveyance losses. Small storage capacity relative to water f l ow and l ack o f control
structures (such as gates) greatly limit the control o f water fl ows within the system, however.
Di stri buti on o f this canal water at the water course l evel i s determined by physical l ocati on along the
canal and the wavabandi system o f established, administratively-set rotations.
Li ke the supply o f cultivable land, the supply o f water in Palustan i s essentially fi xed within a
4.2
expanded since the 1960s, and has led to increased agricultural producti vi ty by provi di ng greater water
control at the f ar m level. Groundwater markets have increased producti vi ty o f farmers who l ack thei r
own tube wells, but surface water markets are l i mi ted t o i nformal transactions within water courses due
t o bot h i nsuffi ci ent water storage and control structures, as well as the absence o f tradable water rights.
In part because o f unreliability o f i rri gati on by canal water, tube wel l i rri gati on has greatly
Water Availability in Pakistan Agriculture
4.3
droughts, water availability at the farm l evel i s a maj or determinant of farm producti vi ty in Pakistan
agriculture. Nearl y 80 percent o f cropped area i s irrigated, and agriculture i s by far the largest user o f
available water sources in the country, consuming on average about 95% o f available water resources.
Gi ven l o w levels o f annual rai nfal l concentrated over onl y a f ew months o f the year and per i od
4.4 Increases in water resource avai l abi l i ty for i rri gati on and expansion o f i rri gated area have
pl ayed a central rol e in agricultural growth since the 1960s. Total i rri gated area increased by 80 percent
between 1960 and 2000, f r om 10.4 to 18.0 mi l l i on hectares, mai nl y due t o an expansion in tube wel l
irrigation. In 2001-02, out o f 18.0 mi l l i on hectares o f i rri gated land, 38 percent was i rri gated solely
with canal water; 39 percent with canal and tube wel l water, and 19 percent solely with tube wel l water.
(Other forms o f irrigation, i ncl udi ng wells, canals with wel l s and tanks) accounted f or the remai ni ng 4
percent). (figure 4.1). About 60 percent o f i rri gated water available at farm head i s provi ded by canal
water; the remai ni ng 40 percent i s supplied by gr ound~at er . ~
4.5
in the wor l d (Box 4.1). On average, approximately two-thirds o f total net water in the Indus basi n
(103.8 out o f 15 1.6 MAF) i s diverted t o canals. Of this total, about 45 percent goes for consumptive
use, with the remainder as conveyance losses (including groundwater recharge). Surplus fl ows t o the
estuary (29.4 MAF); system losses (9.9 MAF) and Indus Treaty Allocations to I ndi a (8.4 MAF) account
for the remai ni ng water. (Table 4.1)
Near l y 97% o f this irrigated area i s in the Indus Basin, the largest contiguous i rri gati on system
~
27 GOP, Water Vi si on 2025 Country Report, ci ted in Wor l d Bank, 2003a, Pakistan Publ i c Expenditure
Management, Accelerated Development o f Water Resources and Irri gated Agriculture, vol . 11.
25
Figure 4.1 Area irrigated by source of irrigation, Pakistan 1982-2001
I
I 9 1 I
Source: Economic Survey 1996-97 and 2001-2
Table 4.1 Average Wat er Balance of the Indus Ri ver System
Item Annual Volume
MAF (million acre feet) BCM (bn cubic
meters)
I NFLOW
Westem Rivers
Eastern Rivers
143.18
8.40
176.54
10.36
Total Inflow 151.58 186.90
OUTFLOW
Indus Treaty Allocation to India 8.40 10.36
Average Canal Diversions 103.84 128.03
System Losses 9.90 12.2 1
Surplus flow to lower River and Estuary
Total Outflow
29.44
151.58
36.30
186.90
Source: World Bank (2003a).
26
Box 4.1: The Indus Basin Irrigation System
The Indus basin irrigation system consists of 3 major reservoirs (Tarbela, Mangla and Chasma dams),
wi th 19 barrages or headworks, 12 link canals and 43 canal commands and about 107,000 water
courses. Wi thi n each canal command there are typically 4-6 branch canals, 2 distributaries per branch
canal, 20-30 minors per distributary, 20-30 water courses per minor. A typical water course i s 2-3
kilometers in length, irrigating 200-700 acres (80-280 hectares) for 20-30 farmers.
In the Indus system, river water i s diverted by barrages and weirs into mai n canals and subsequently
into branch canals, distributaries and minors. The fl ow to the farm i s delivered by the watercourses
whi ch are supplied through outlets (moghas) from the distributaries and minors. The mogha i s
designed to allow a constant discharge that sel f adjusts to variations in the parent canal. Within the
watercourse command, farmers receive water proportional to their land holding. The entire discharge
o f the watercourse i s given to one farm for a specified period on a seven or ten day rotation, called
warabandi.
Flat topography and lack o f well-defined natural drainage in the Indus Pl ai n create a surface drainage
problem whi ch has been compounded by the construction of roads, railways, fl ood embankments, and
irrigation systems that obstruct natural drainage flows. In spite of investments in surface drains and
deep tube wells, (the latter installed as part o f SCARPS -- Salinity Control and Reclamation Projects),
drainage remains a major problem.
Source: World Bank (1994). Pakistan Irrigation and Drainage: I ssues and Options.
4.6 Conveyance effi ci ency in the system i s l ow, however (45 percent). Inadequate maintenance
results in canal losses (up to canal outlets) o f 25 percent. Unl i ned watercourses result in another 40
percent loss f r om canal outlet to farm gate. Though these conveyance losses reduce avai l abi l i ty o f
surface water, they nonetheless contribute t o groundwater resources.28
4.7 Surface water avai l abi l i ty at the farm head in the Indus Basi n System has changed l i ttl e since
the late 1970s when the Tarbela dam was completed, remai ni ng at about 62 MAF per year. The maj or
increase in availability has been due to the growth in groundwater use - f r om 4.2 MAF (8 percent o f
water availability) in 1960-61 t o over 40% in the late 1980s, after whi ch ti me i t appears t o have
changed very l i t t l e. This large growth in groundwater use was stimulated in part by the use o f tube
wel l s for vertical drainage and water table control under the Sal i ni ty Control and Reclamation Projects
(SCARPS), whi ch are now bei ng gradually turned over to communities and Water Users Associations
( WAS) , as well as by the large spurt in farm mechanization in the 1980s and the avai l abi l i ty o f
inexpensive tube wel l technology in the market. However, one cri ti cal consequence o f this growth i s
that increasing amounts o f salt are ci rcul ati ng vertically in the system, progressively poi soni ng the soi l
because drainage and evacuation o f salt f r om the basin i s inadequate. ( Wor l d Bank, 2003a).
28
(though they are indeed losses in saline groundwater areas). This seepage, however, essentially reallocates water
from those downstream who only have access to canal water to those with access to tube wells. Moreover, since
conjunctive use of canal water and groundwater to control water logging and salinity has been a key principle
underlying the overall irrigation development strategy since the 1960s, one cannot look at either canal water or
groundwater in isolation in the Indus Basin system. (World Bank, 2003a)
In fresh groundwater areas, canal and field seepage are an increasingly important source of irrigation water
27
4.8
late 1990s), also contributed to the growth in tube well irrigation. Removal o f these subsidies have
increased the cost o f groundwater for tube wel l owners and purchasers in groundwater markets. The
l o w effi ci ency o f pumps also contributes t o high operating costs.
L o w pri ces o f energy (electricity and fuel), whi ch remained in place until pr i ci ng reforms in the
4.9 Moreover, in part because o f successive droughts, water tables in Punjab, NWFP, and
Baluchistan have receded, adding to costs o f pumping and contributing t o reduced quality. Ali and
Byerlees2 decomposition o f crop sector producti vi ty growth in Punjab f r om 1971-94 showed that on
average about hal f of the positive contribution of technological change (cropping i ntensi ty and new
crop varieties) and publ i c investment (roads and literacy) was offset by soi l and water qual i ty
degradation due t o water-logging and salinity.
Access to Water and Agricultural Productivity
4.10
cul ti vati on i nt o areas and seasons that l ack sufficient rai nfal l for agriculture. However, the publ i c
i rri gati on systems do not provide farmers with adequate water or enough control over i rri gati on
deliveries t o meet the demands o f more input-intensive green revol uti on technology and increasing
popul ati on pressure. Moreover, problems with operation and maintenance o f the canal systems have l ed
t o increased water losses in the channels, but no allowances for these water losses are made in the water
rotati on system .
Surface Water. The development o f surface i rri gati on in Pakistan permitted the extension o f
4.1 1 Since the ti me o f the British Raj in Pakistan, access t o surface water has been ti ed with l and
ownership. Canal water i s distributed to each acre on a water course according t o rotati on system
(warabandi), with each l and owner or ti l l er o f l and allotted a turn t o use water f l ow in the canal at a
specified ti me every seven to t en days (depending on the geography o f the water course). The access t o
water i s l i mi t ed t o a farmer who owns l and in a water course command area and the time allotted t o
each turn i s di rectl y proportional t o size o f holding, irrespective o f the cropping pattern. The durati on
varies f r om 20 to 30 minutes per acre. This di stri buti on system was designed for croppi ng i nt ensi t y o f
70 percent, but the existing cropping intensity is126 percent (Government o f Pakistan 2002). As a
result, tail-end distributaries and watercourses do not receive enough canal water for the current
croppi ng intensity, and delivery schedules are unreliable in many areas.30
4.12 Water charges are assessed on the bases o f crop land, the relative burden o f payable water rates
per canal command area i s essentially determined by the intensity o f cropping. Water rates vary by
crop, and there i s systematic relationship between water rates and water requirements f or various crops.
For example, water charges for rice, wheat and sugar cane are Rs. 2.0, Rs. 3.0 and Rs 2.0 per acre i nch.
The present l evel and structure o f water charges constitute onl y a small fraction o f cash producti on cost
and net farm incomes (varying f r om 8 percent to 26 percent o f total cash costs).31 Thus there i s
considerable scope f or increases in water charges t o farmers t o cover the operation and maintenance o f
the i rri gati on systems.
29 Productivity Growth and Resource Degradation in Pakistans Punjab: A Decomposition Analysis; Mubari k
Al i and Derek Byerlee; Worl d Bank Policy Research Worki ng Paper No. 2480; November 2000.
30 Monthl y canal withdrawals vary from month to month depending upon the rainfall and decision o f the Indus
River System Authority. The average monthly f l ow i s 4.7 MAF wi t h a coefficient variation (CV) as 32 percent in
Punjab, 3.9 MAF and CV as 5 1 percent in Sindh, 0.055 MAF and CV as 66 percent in NWFP, and 0.26 MAF and
CV as 67 percent in Balochistan. (Monthly f l ow data for 1999; WB 2003, p.xx)
31 Z. Hussain, 2003.
28
4.13 Ownershi p of a pl ot within a watercourse command area confers access t o i rri gati on water, but
does not guarantee canal water availability. In particular, water availability decreases significantly i f
the watercourse i s located near the t ai l o f the distributary or minor, and/or if the pl ot i s located near the
tai l end o f the watercourse (Worl d Bank, 2002).
4.14
For example, in the Nara canal, an estimated 30-40 percent o f the water i s diverted through i l l egal
direct o~t l et s. ~ Administrative reforms giving greater control t o farmers as part o f the Nati onal
Drainage Program (box 4.2) may help reduce these misappropriations o f water, however. In the
command area covered by the Lef t Bank Area Water Board, where tai l end farmers had not received
water in three years, 48 i l l egal direct outlets serving an area o f about 25 thousand hectares were closed
in early 2004.
Water theft by farmers upstream i s a maj or reason for water shortages faced by tai l end farmers.
Box 4.2: Administrative Reforms in Canal Water Management
Within the framework o f the Nati onal Drainage Program, a package o f administrative reforms were
t o be implemented in one canal command in each province. These reforms consist pri mari l y o f
decentralization and management transfer o f the i rri gati on and drainage system t o water users. In
this comprehensive approach t o Canal Management: i) federal agencies, notabl y the Water and
Power Development Authoritys (WAPDAs) Water Wing, are strengthened t o better i mpl ement
their federal responsibilities; ii) Provi nci al Irri gati on and Drainage Authorities (PIDAs) are
established with a certain degree o f autonomy t o oversee and provi de technical assistance to the
transfer process as wel l as to agree on water allocation and monitoring; iii) Area Water Boards
(AWB) are established at the l evel o f a canal command t o manage the transfer process at the canal
and distributary l evel with the participation o f Farmers Organizations; iv) Farmer Organizations
(FOs) are promoted to take over operations and maintenance at the watercourse l evel by permitting
assessment, collection and retention o f the abiana; and v) development o f water markets and
i ndi vi dual water property rights i s fostered. The degree o f implementation o f these administrative
reforms has varied considerably across province. Altogether, onl y the Sindh Provi nce has
implemented the reform package and applied it t o the Nara canal command area. Whi l e a thorough
i mpact assessment o f the reforms in the Nara canal i s needed, i ni ti al evidence suggest that this
participatory i rri gati on management approach has resulted in increased efficiency, effective
participation o f farmers in operations and maintenance as wel l as in decision maki ng over the al l ocati on
of water, and reduction in water theft.
Source: Wor l d Bank 1997. Staff Appraisal Report: Pakistan Nati onal Drainage Program Project,
April. Report No. 15310-PAK.
4.15 Even in the absence o f water theft, there i s a l ack o f transparency in water allocation that
derives largely f r om the l ack o f participation o f farmers in water management decisions and the
tendency o f the departments t o centralize management decisions such as water allocation. Some
farmers attempt to influence these water allocations at the l ocal l evel through i nf or mal payments t o
officials and pol i ti cal pressure, however. Regression analysis shows that when the data are control l ed
for pl ot location, the availability o f canal water increases significantly where farmers reported i nf or mal
32 Manuel Cantijoch, Senior Water Resources Specialist, Wor l d Bank.
29
payments f or water; where there i s l ess inequality o f l and ownership, and where the l and hol di ngs o f the
three largest cultivators on the watercourse i s high.33
4.16
Accordi ng t o PRHS (200 1-02) data, average farm sales/purchases o f canal water were onl y 5.5 hours,
equal t o onl y 2.7 percent o f canal water endowments, though in one district (N. Shah in Sindh), average
farm sales/purchases were 25.6 hourdfarm, equivalent to 39 percent o f canal water endowments.
Average non-market transactions were even smaller (5.2 hourdfarm, onl y 2.5 percent o f canal water
endowment^).^^ The PRHS data apparently do no capture i nformal canal water trading, however.
Accordi ng t o a 2003 survey in central Punjab, f ew farmers buy or sell canal water (less than 6 percent)
for cash, with the pri ce of canal water ranging f r om Rs 125 t o 240 per
percent o f the farmers at the head and mi ddl e o f distributaries, (and 50 percent o f farms at the tail)
traded water.
Sales of canal water are technically illegal, but limited sales and exchanges do take place.
In contrast, more than 80
Groundwater
4.17
conditions that affect the amount o f water in the Indus river, but because o f the uncertainties in
distribution related t o water misappropriation discussed above. Groundwater supply, in contrast, i s
more reliable, and thus helps overcome water shortages, as wel l as i mprove i rri gati on timing. Largel y
for these reasons, groundwater use has expanded rapi dl y in Pakistan (Worl d Bank, 2003a). In addition,
until pri ci ng reforms in the late 1990s, tube well i rri gati on was subsidized through l o w prices o f energy
(electricity and fuel).
Avai l abi l i ty of canal water at the farm l evel varies significantly, not onl y because o f weather
4.18 The l o w efficiency o f pumps contributes to high operating costs. Moreover, in part because o f
successive droughts, water tables in Punjab, NWFP, and Balochistan have receded, adding t o costs o f
pumping and contributing to reduced quality. Water qual i ty i s also increasingly a probl em in Sindh.
4.19
with l i t t l e systematic variation by i ncome (proxied as total consumption). Even among the poorest 20
percent o f cul ti vati ng households, 5.1 percent owned tube wells; 1 1 .O percent o f the richest 20 percent
of cul ti vati ng households owned tube wells. (p.86 WB 2002).
PRHS (2001/02) data indicate that onl y 8.1 percent o f cul ti vati ng households owned tube wells,
4.20 Groundwater markets significantly i mprove access t o groundwater, parti cul arl y for smal l
farmers, landless tenants and younger households who often l ack the resources (or l and and water
rights) to i nstal l their own tube wel l . However, water purchasers do not have full access rights t o the
water, and are frequently denied access when water or energy supplies are scarce. Unrel i abi l i ty o f
access t o purchased water was a probl em for more than hal f o f the water buyers in an I FPRI sample
survey in 1993, limiting the producti vi ty o f groundwater for p u r c h a ~e r s . ~~
4.21
usually supply-driven. Farmers offer water for sale onl y after satisfying water needs on their own fields.
Accordi ng to a 2003 survey in central Punjab, few farmers buy or sell canal water (less than 6 percent)
However, current i nformal water markets in Pakistan are fragmented and localized, and are
33 One reason f or the posi ti ve correlation between larger landowners and water avai l abi l i ty i s that these cultivators
are l i kel y t o be able t o l obby more effecti vel y with i rri gat i on offi ci al s and politicians. Wor l d Bank 2002, p. 90).
34 Anri quez and Valdes, 2004, p.8
35 Z. Hossain (2003).
36 Mei nzen-Di ck (1996).
30
f or cash, with the pri ce o f canal water ranging f r om Rs 125 to 240 per hour. In contrast, more than 80
percent o f the farmers at the head and mi ddl e o f distributaries, (and 50 percent o f farms at the tail)
traded water. Tube well water sales are much more common: more than 90 percent o f farmers with
tube wel l s sol d tube well water, with the mean quantity sales o f 5 hours.
4.22
most o f the groundwater market areas. This t ype o f arrangements occurs under al l types o f tube wel l s.
Water f r om diesel pump sets i s commonl y sold under an arrangement whereby the buyer supplies the
diesel and mot or oi l for the pump and pays an additional fee per hour to the wel l owner t o cover the
wear and tear o n the engines. Share cropping contracts f or water are used under bot h diesel and electric
tube wells.
A fl at charge per hour o f pumping i s the most common f or m o f groundwater market contract in
4.23
higher prices o f water f r om PTO tube wells reflect the higher cost o f operating this type o f pump. The
average pri ce of water under the hourl y charge system i s approximately the same f or diesel and electric
tube wells, although the former are usually more expensive to operate. The mean hour l y cost o f water to
the purchaser f r om diesel tube wells i s slightly higher under the buyer-brings-fuel system than under the
flat hourl y charge. Water sellers with diesel pumps are apparently onl y recovering thei r own operation
and maintenance costs under either type o f contract. The sellers transaction costs in acqui ri ng the f uel
and operating or supervising the operation o f the pump are presumably higher under the hour l y charge
contracts but there may be reluctance to l et some purchasers operate the pumps themselves under the
buyer-brings-fuel system.
Prices under the hourl y charge system depend on the pump type, capacity and location. The
Implications for Agricultural Productivity
4.24
be possible through shi fts in cropping patterns i nduced by increasing the opportunity cost o f water t o
farmers. The average net income o f water for IRRI r i ce in Punjab i s onl y Rs 47 /acre-inch o f water
compared to Rs. 2 15 f or cotton (table 4.2). The corresponding figures f or Sindh are Rs 66 f or IRFU r i ce
and Rs 361 for cotton.37 Increases in the opportunity cost o f water for IRRI ri ce farmers through the
opportunity to sell water rights coul d promote more effi ci ent use o f water in IRRI r i ce cultivation, as
wel l as increase incentives and water availability f or cul ti vati on o f less water-intensive crops.
Similarly, better allocation o f water coul d even bring about an increase in area cultivated in some
regions. For example, because o f uncontrolled direct outlets in the Nara Canal in Sindh, the command
area has increased by 30 percent, leaving large areas in the tai l porti on o f the canal wi thout suffi ci ent
water.
Data on water use and crop incomes suggest that large gains in average water producti vi ty may
4.25
Crop yields o f ri ce and wheat are 1.3 t o 1.5 times hi gher at the t ai l o f canals than at the head; sugar cane
yields are 1.9 times higher at the tai l than at the head3* ,39
Increasing water availability t o tail-end farmers coul d also have large effects on producti vi ty.
37 These data need t o be interpreted cautiously since water qual i ty and avai l abi l i ty o f supplemental tube wel l
i rri gati on vary within provinces. Moreover, duri ng the khar i f season, there are f ew alternatives t o ri ce on water-
l ogged land.
38 Nat i onal Agri cul tural Commi ssi on Report (1987), p. 289.
39 In contrast, econometric analysis of survey data f r om the earl y 1990s (Jacoby and Murgai , 1998) suggests that
at a mi cro-l evel (within the boundaries o f a water course), there were onl y mi nor product i vi t y losses t o t ai l end
farmers, Moreover, the expansion of private tube wells may have even further reduced the product i vi t y di fferenti al
between head and t ai l farmers.
31
Table 4.2 Returns to Irrigation of Major Crops, Pakistan 2002-2003
Gross
ProvinceJCrops Revenue Total Cost Net Income Irrigation Water Net IncomebVater Use
Punjab
Cot t on
Sugarcane
Wheat
Ri ce
Basmati Ri ce
IRRI Ri ce
Sindh
Cotton
Sugarcane
Wheat
IRRI Ri ce
NWFP
Rs
15,093
25,425
9,000
13,395
9,387
13,554
37,181
8,325
10,374
Rs
11,658
15,622
6,130
5,722
6,405
6,333
21,375
6,913
6,140
Rs Use Acre Inches
3,434
9,802
2,569
16
64
16
7,622 64
2,98 1 64
7,220 20
15,806 64
1,412 16
4,234 64
Rs/acre inch
215
153
161
119
47
361
246
88
66
Sugarcane 32,199 211,163 11,036 64 172
Note: Net i ncome excludes i rri gati on cost.
Source: Agri cul tural Prices Commi ssi on (APCOM), Ministry o f Food, Agri cul ture and Li vestock, Government
of Pakistan, Cost o f Producti on Studies, series 2002-2003
4.26
showed that groundwater has a higher i mpact on wheat yields than canal water, and that water markets
that increased groundwater available t o farmers who do not own tube wells clearly increased the l evel
of agricultural productivity. Water f r om own wel l s was even more productive, most l i kel y because o f
the less regular availability o f purchased water.40
Increased availability o f groundwater coul d have even greater effects. Mei nzen-Di ck (1996)
4.27
markets for tube well water markets do not functi on efficiently. Control l i ng for tube wel l availability,
pl ots cultivated by tube wel l -owni ng households have a 15 to 17 percent higher uti l i zati on rate than do
households wi thout tube wells. I f tube wel l markets functioned efficiently, water sales woul d resul t in a
smaller difference in water use between owners o f tube wel l s and buyers o f tube wel l water. The
estimated impact on producti vi ty i s very large and highly significant in the r abi season: ownership o f a
tube well, control l i ng for access o f a pl ot to a tube wel l (whether owned or not) raises wheat yi el ds by
30 percent and rabi season net revenues by 83 percent.41
Analysis o f PRHS 2002-03 data on groundwater use per acre at the pl ot l evel suggests that
Laws and Regulatory Framework for Wat er
4.28
measure water fl ows woul d enable farmers to maxi mi ze their incomes by al l ocati ng water according t o
Effi ci ent water markets, tradable water rights and physical infrastructure to transfer water and
40 Mei nzen-Di ck (1996).
41 Pakistan Poverty Report, 2002, pp. 99, 101.
32
i t s most opti mal use (whether on their own fields or sales to or purchases f r om other farmers). The
current regul atory framework in Pakistan, however, impedes the development o f water markets.
4.29
whi l e the Federal government i s responsible for regulation and development o f inter-state ri vers and
ri ver valleys, provi nci al govemments are responsible for water supplies, i rri gati on and canals, drainage
and embankments, and water storage . Nonetheless, the power o f the provinces has emerged as pre-
eminent and water has come t o be perceived as a provi nci al subject.
Paki stani L a w treats al l surface water as provi nci al property. Under the Pakistan Constitution,
4.30
basins (i ncl udi ng the Indus basin) extend across province boundaries. In the absence o f l egal cl ari ty on
what i ndi vi dual provi nci al shares are, each province has argued for as large a share as possible. It i s
therefore i mportant to introduce necessary l egal arrangements t o facilitate the management o f surface
water on a r i ver basin basis, before formal water markets can be introduced. Government has
constituted the Indus Ri ver System Authori ty (IRSA) whi ch decides inter-provincial allocation water
based on the Water Accord o f 1991. But, disputes are quite common among the provinces, and
allocations are st i l l made on the basis o f historical distributions o f water.
This has serious ramifications for inter-provincial water development and allocation, since
4.3 1 Indi vi dual usufructuary rights for surface water are not clearly defined, however, as the
legislation has fai l ed t o devise a system for provi di ng secure, defensible and enforceable surface water
rights. Unless surface water rights are better cl ari fi ed and in favor o f individuals, confl i ct and l i ti gati on
wi l l grow in the future and formal water markets wi l l not be possible.
4.32 Separating rights t o groundwater f r om rights to l and i s another necessary step for groundwater
market developments. Accordi ng t o the ri pari an allocation o f water in Pakistan, ownership o f
groundwater belongs t o the owner o f the l and above. By vi rtue o f these laws, groundwater i s attached
l and property and cannot be transferred separately f r om the l and t o whi ch it i s attached. This has
l i mi ted the potential for inter-sectoral allocation. For instance, a l ocal muni ci pal committee or counci l i s
not authorized t o have access t o groundwater f r om the nei ghbori ng farms wi thout buying thei r l and. To
establish an active formal water market, rights t o water use must be separated f r om l and f or alternative
use.
4.33
users. The l ack of these limits, coupled with tying l and rights with water rights, has serious equi ty
implications, because it allows larger farmers with higher pumping capacity and deeper tube wel l s t o
have a disproportionate cl ai m over water than others. Establishment o f wi thdrawal limits woul d also
promote efficient water use. In addition, an efficient market requires the pr i or existence o f an effective
l egal i nsti tuti on of property rights, establishing the i ni ti al resource endowments o f individuals. There i s
therefore a need to specify water wi thdrawal limits by i ndi vi dual s in vol umetri c terms. Fi nal l y,
ecological sustainability requires that collective wi thdrawal limits keeping in vi ew the annual recharge,
Fi nal l y, existing l aws place no quantitative limits on groundwater wi thdrawal by i ndi vi dual
V. RURAL LABOR MARKETS
5.1
demand constraints, rather than supply constraints, as evidenced by substantial underemployment.
Compared t o l and and water, labor i s much more mobi l e across sectors, and labor mi grati on between
regions and between rural and urban areas helps link labor markets across the country. Incomes f r om
labor are a maj or source o f incomes for the rural poor, who often l ack sufficient access to l and and
water. Nonetheless, l ow levels o f educational attainment, l ack o f marketable ski l l s, l o w female
parti ci pati on rates, and ineffective enforcement o f l aws regarding chi l d and bonded labor, al l contribute
to l o w producti vi ty o f labor and reduced labor earnings.
Unl i ke the markets for l and and water, r ur al labor markets are generally characterized by
St r uct ur e of L a b o r Use
5.2
2002-03). Of this total, 29.82 mi l l i on (29 percent) participated in the labor force in wor k other than
household work. Counting onl y popul ati on age 15 and above, the labor force participation rate was 50
percent (table 5.1). Reported unemployment i s l o w (5.7 percent in 1997-98), refl ecti ng the
predominance o f i nformal sector and self-employment in the labor market. Estimated
underemployment (defined as employment less than 3 5 hours per week) i s considerably higher,
however (16 percent, according to the 1999-2000 Labor Force Survey).
Two-thi rds o f Palustans popul ati on l i ve in rural areas (100.6 mi l l i on out o f 149.0 mi l l i on, in
5.3 Aggregate labor force participation rates have changed l i ttl e over time, though offi ci al figures
for unemployment rates doubled f r om 3-4 percent in the mid-1980s to 7-8 percent in 2002-03 (table
5.2). Reported underemployment rates have also increased, but at a lesser pace. Underempl oyment in
r ur al areas rose f r om 12 percent in 1985-86 to 16 percent in 1999-2000. The highest rates were found
in NWFP (21 percent), and the lowest in Balochistan and Sindh (12 and 11 percent, respectively).
5.4
employed or actively seeking employment, as compared t o onl y 16 percent o f women in the same age
group, Incl udi ng housekeeping and other related activities as employment raises the calculated
participation rate o f women age 15 years or greater t o 50 percent. These l ow female parti ci pati on rates
in part refl ect cultural norms and i ndi vi dual preferences. Nonetheless, various studies have found that
females decisions to participate in the labor market are significantly influenced by household income,
family size, educational attainment, and the market wage rate.
Participation rates vary sharply by gender: 85 percent o f men age 15 years or greater are
34
Table 5.1 Pakistan Rur al Labor Force, 1998 (thousands)
Male Female Total
Population
Working Age Population
Labor Force
(age 10-14 years)
(age 15+ years)
Total (age IO+ years)
Participation Rate
(age 10-14 years)
(age 15+ years)
(age 1 O+ years)
Total Population
Employed Labor Force
Unemployed Labor Force
43,830
29,640
51.5%
51.3%
1,015
72.2%
19,733
85.3%
20,748
84.5%
17.2%
83.1%
70.0%
47.3%
19,812
85.5%
936
41,233
28,099
48.5%
48.7%
392
27.8%
3,407
14.7%
15.5%
7.6%
14.8%
13.5%
9.2%
3,799
3,349
14.5%
451
85,063
100.0%
57,739
100.0%
1,407
100.0%
23,141
100.0%
100.0%
12.7%
49.6%
42.5%
28.9%
24,548
23,161
100.0%
1,387
Unemployment Rate (97-98) 4.5% 11.9% 5.7%
Source: Pakistan Popul ati on Census and Labor Force Surveys.
Tot al unemployment rate f r om Table 12.9 Pakistan Economi c Survey 1999-2000.
1999-00 I 39.84 I 28.03 I 28.97 I 29.82 I 7.82 I 6.94 I 13.64 1 16.08
2002-03 I 42.38 I 29.82 I 28.97 I 29.82 I 7.82 I 6.94 I
I I
Source: Labor force survey (various issues), Government o f Pakistan
5.5 Education levels o f the r ur al labor force are l ow, but have i mproved over ti me. In the late
1960s, 75 percent of employed people in Pakistan were illiterate. By 200 1-02 this percentage had
declined to 53 percent overall, and 62 percent in r ur al areas [HIES (2001-02)]. Econometric analysis
indicates that an education i s posi ti vel y correlated with the probabi l i ty o f rural -urban mi grati on, labor
producti vi ty in the non-farm sector, and female labor force participation. Hi gher education i s also
posi ti vel y correlated with unemployment, as ski l l ed workers who cannot find j obs in their fi el ds often
35
Agriculture, forestry, hunti ng and fishing
Manufacturi ng
Construction
Wholesale, retailitradelrestaurantsihotels
Community, social and personal services
Tot al
choose t o r emai n unemployed rather than take unskilled labor positions. For example, in 1999-00,
among total unemployed in rural areas, 61 percent were literate. Moreover, higher education i s
correlated with increased rural household incomes. For the average producing farm household, another
year o f education translates i nto a 13% increase in yearly net revenues (Annex 2; Anriquez and Valdes,
2004).
Proportion in total
underemployed
Proportion in total employed
63 15
8 14
12 47
4 10
11 24
100 17
Sectoral Composition of Labor Use
5.6
activities), mai nl y own-fami l y labor. There are significant variations across provinces, however.
Agriculture1 accounts for 74 percent o f rural employment in Sindh, but onl y 54 percent o f rural
employment in NWFP, where the shares o f trade, transport and other services are higher than the
national average (table 5.3).
The agricultural sector accounts for two-thirds o f rural employment (excluding household
Table 5.3 Percentage distribution of rural employed persons by major sectors and provinces
(1999-00)
Source: Labor force survey (1999-00), Government o f Pakistan
5.7 Overall, 15 percent o f people employed in agriculture were underemployed, accounting f or 63
percent o f the total number o f underemployed persons (table 5.4). Nearl y hal f o f the people empl oyed
in construction were underemployed. Underemployment in service sectors (not i ncl udi ng trade,
restaurants and hotels) was 24 percent.
Table 5.4 Underemployment rates by Occupation (1999-00)
~
Source: Labor Force Survey (1999-00), Government o f Pakistan
36
5.8
educated members o f a household are more l i kel y t o take pai d farm jobs, although marriage t i l t s this
choice towards marri ed men and away f r om marri ed women. However, as the i ndi vi dual l evel o f
schooling increases, heishe becomes less l i kel y t o wor k in pai d farm employment and more l i kel y t o
wor k in non-farm jobs. Remittances in general tend to reduce participation in pai d-farm j obs but have
n o significant effect on non-farm employment.
Econometri c analysis o f the 2001 Labor Force Survey data (Annex 5.1) suggests that the more
5.9 Forei gn remittances (whi ch are typi cal l y large relative t o l ocal wages) tend t o reduce
participation in non-farm employment. This finding i s consistent with Adams (1 998) report o n the use
of foreign remittances by rural households. He finds that foreign remittances tend t o be invested in
physi cal assets, suggesting that households that receive forei gn remittances can increase labor
producti vi ty in own-farm or fami l y enterprises.
Trends I n Wages
5.10
percent per year f r om 1984 to 1994, i ndi cati ng l ong t er m tightening o f the labor market. Li kewi se, real
wage rates of construction laborers increased by 1.1 percent over the same period. Most o f the
increases in r eal wage rates took place in the 1980s, however. The trends in the 1990s, however,
indicate l i ttl e gains in real wages. Fr om 199 1-97, real wage rates o f casual agricultural laborers grew
by an average o f 0.8 percent per year, whi l e real wage rates o f regular agricultural workers f el l by 2.4
percent per year. Likewise, real wage rates o f construction laborers grew by onl y 0.4 percent per year
from 199 1-97 and for the 199 1-2002 as a whole, f el l by 0.4 percent per year.
Real wage rates o f bot h regular and casual agricultural workers increased by an average o f 1 .O
5. 1 1
slower but st i l l positive per capita agricultural growth. As i s discussed in chapter 7, the structure o f
l and di stri buti on and total agricultural earnings may partl y expl ai n why agricultural growth did not lead
t o increased or at least approximately constant real wages. The smaller rate o f decline o f real wages f or
construction laborers suggests that l ack o f labor mobi l i t y between sectors and between r ur al and urban
regions hinder integration o f non-agricultural and agricultural labor markets (table 5.5 and fi gure 5.1).
The decline in real wages in the agricultural sector in the 1990s coincides with a peri od o f
Table 5.5 Growth in Real Wage Rates in Pakistan, 1984-2002
Agri cul tural Construction
Regular Casual Carpenter Laborer
1 984-9 1 3.27 1.46 0.62 1.64
1991 -97 -2.39 0.84 -1.70 0.37
1984-97 0.95 0.99 -0.34 1.12
1991 -2002 n.a. n.a. -1.49 -0.44
Note: Real wages are calculated using the nati onal Consumer Pri ce Index.
Sources: Government o f Pakistan (various issues). Mont hl y Statistical Bul l et i n.
Federal Bureau o f Statistics. Pakistan Economi c Survey (2002-03).
37
2 ::: -
2 110 -
2 9 0 -
2
N
0
0
C5 7 0 -
50 -
Figure 5.1 Real Wages in Pakistan: 1984-2002
Employment Contracts I n Agricultural And Non-Agricultural Sectors
;
5.12
agricultural labor force; tenant farmers accounted for another 25 percent. The shares o f permanent and
casual hi red workers were onl y 2 and 0.8 percent, respectively. Casual labor i s usual l y employed onl y
in periods o f peak labor demand for seasonal activities such as transplanting (paddy) and h a r ~ e s t i n g . ~ ~
Moreover, the use of casual labor has declined across farm size as wel l as di fferent tenurial categories.
Accordi ng to the 1990 Agri cul tural Census, fami l y workers accounted for 72 percent o f the
5.13
casual, piece rate, unpaid fami l y helpers and self-employed. Wage workers are the dominant type o f
laborers (65 percent of rural non-farm employment in the 1999-2000 Labor Force Survey); sel f -
employed and unpai d fami l y labor account for onl y 33 percent o f rural non-farm employment.
In the rural non-farm sector, contractual arrangements take many forms: permanent, f i xed term,
5.14
The technology used i s generally highly labor-intensive (Sayeed and Ali, 1998). Only 7 percent o f
these i nformal sector employees in 1999-2000 were female.
Most o f the employment i s in the i nformal sector (68 percent) and i nvol ves l ow-ski l l ed j obs.
5.15 The other third o f the non-farm l abor force i s employed by the formal sector (registered firms),
under either a permanent or fixed-term contract basis43, Al l labor l aws are applicable t o permanent
labor. Contract workers, on the other hand, are recruited through a contractor f or a specific ti me period,
and are usually pai d per amount o f ti me worked (monthly, weekly or daily) by the contractor. The
contractor, in turn has entered i nto an i nformal arrangement with the employers for provi si on o f labor
42
Fafchamps and Quisumbing (1989) reported that 91 percent o f khar i f (monsoon season) farmers and 89
percent o f r abi (winter season) farmers in the districts sampled did not use any hi r ed l abor. Hi r ed labor, empl oyed
mai nl y at harvest time, accounts f or 21.5 percent and 23.6 percent o f total l abor f or khar i f and rabi, respectively.
43
Sayeed and Al i (1998) f ound that 25 percent o f the total employees were permanent workers in the
manufacturing sector. A large maj ori t y (68 percent was concentrated in the large scale manufacturing. The
proporti on o f contractual workers in large scale manufacturing as percent o f t ot al manufacturi ng empl oyment was
32 percent. This indicates that i nf ormal sector manl y consists o f contractual and casual labor.
38
for a pre-determined lump sum.44 These workers are not el i gi bl e for any o f the employment benefits that
permanent workers have.
Labor Mobility and Migration
5.16
spite o f heavy transactions costs i nvol ved that limit the capability o f poor households t o migrate.
Accordi ng t o HI ES (1998-99), 30 percent o f current urban residents are migrants. Among them, 41
percent moved f r om other urban areas and 59 percent moved f r om rural areas. Mi gr ant households are
also found in r ur al areas, though t o a lesser extent. Nearl y 14 percent o f rural households are migrants.
Rural t o r ur al mi grati on (8 1 percent o f rural migrants) far outnumber urban t o rural migrants (1 9
percent o f migrants).
Considerable rural-urban mi grati on has taken place in Pakistan in the past several decades, in
5.17
determinants o f mi gr at i ~n. ~ 45 percent o f rural to urban mi grant heads o f households mi grated in order
to find j obs and 9 percent for the purpose o f business. The maj ori ty o f these mi grant workers are
employed as l ow- or unshl l ed wage workers. Age, education, and employment status are maj or
determining factors o f rural-urban mi grati on (Akram, 2000). In particular, unpai d f ami l y helpers are
more l i kel y t o move f r om one rural area to another rural area, whereas, employers and employees move
towards urban centers.
The available literature on mi grati on indicates that age and education are important
5.18
accounting f or 9 percent o f total rural household incomes (HIES, 2001-02 data). Forei gn remittances
tend to be used for the accumulation o f land, and domestic remittances have a posi ti ve and significant
effect on the accumulation o f agricultural capital (Adams, 1996).
In r ur al areas o f Pakistan, domestic and foreign remittances are important source o f income,
5.19
in case o f extreme distress. They however have the opportunity t o reallocate their labor towards other
sources o f income, such as, non-farm activities, particularly i f they acquire education. Accordi ng t o
Fafchamps and Quisumbing (1 998), one additional year o f schooling for an adult males raises
household incomes by 4.5 percent. One-fi fth o f this additional i ncome was achieved by reallocating
labor away f r om farmi ng and toward non-farm work. Kurosaki and Khan (2003) found similar results
for NWFP, Palustan. Wages and producti vi ty in the non-farm sector rise at an increasing rate with
education, whereas non-agricultural workers were found responsive onl y t o pri mary education.
Since mi grati on incurs some cost, poorer households may not be able t o afford t o migrate, even
Gender Issues
5.20
South Asia: 11 percent in 1999-00 (Table 5.6). Participation rates vary substantially by provi nce f r om
onl y 3 percent in Balochistan t o 15 percent in Punjab. Incl udi ng unpai d fami l y labor, however,
participation rates increase t o 34 percent nationally, and are much more uni f or m across province,
rangi ng f r om 3 1 percent in Balochistan to 41 percent in NWFP. Female labor force parti ci pati on rates
are generally l ower for younger women, because o f household responsibilities and cul tural and f ami l y
norms (Arif and Sheikh, 2002).Reported unemployment rates are very high in NWFP and Balochistan
(3 1 and 44 percent, respectively).
Female labor force participation in Pakistan for activities outside the home i s the l owest in
44
45
See Sayeed and Ali (1998) and FES (1993).
See Adams (1996) and Qureshi and Arif (1999).
39
Table 5.6 Female Labor Force Participation and Unemployment in Pakistan, 1999-2000
Labor force Improved participation Unemployment Underemployment
participation rate rate *
Pakistan 10.7
Punj ab 13.2
Si ndh 6.0
NWFP 8.4
Balochistan 3 .O
34.3 14.0 6.9
32.7 10.9 8.5
34.4 11.0 2.6
40.9 31.2 6.5
3 1.4 44.2 3.1
Source; Labor Force Survey (1999-00)
Notes: *According to the ol d methodology persons 10 years o f age and above reporting housekeeping and other
related activities are considered out of labor force. However, as per improved methodology, they are
identified as employed if they have spent time on one o f fourteen specified home-based agricultural and
non-agricultural activities.
5.21
strong social and cultural values adopted by the household. Economic factors pl ay a significant, though
smaller rol e, Numerous studies have shown that womens decisions to participate in the l abor market
are si gni fi cantl y determined by fami l y structure, relationship with the head o f the households, f ami l y
size, educational attainment, household i ncome and the market wage rate.46 Chaudhry and Khan (1 987)
observed a negative association o f income class and presence o f male earner, and posi ti ve effect o f
educational attainment on the probabi l i ty o f participating in income generating activities. Sultana,
Nazl i , and Mal i k (1994) get similar resul t s when they di vi de total time i nto market producti on leisure
and home production. These studies stress the need o f expanding the opportunities and access t o
educational and training institutions in addi ti on t o opening up more vacancies parti cul arl y f or women.
In Pakistan, womens decisions t o participate in the labor force are greatly i nfl uenced by the
5.22
in agriculture. Maj or agricultural activities i ncl ude l and preparation, seed preparation, col l ecti ng f ar m
yard manure, weeding and harvesting, as wel l as cleaning, drying, and storage o f grains. Rur al women
also usually take care of household l i vestock -- col l ecti ng fodder, cleaning sheds and processing ani mal
product^.^'.
Accordi ng to the 1999-2000 Labor Force Survey, 87 percent o f worki ng females were engaged
5.23 Li mi t ed access to health, education, vocational trai ni ng and credit facilities constrain women s
opportunities for non-agricultural wage l abor and especially whi te collar jobs. Communi ty, soci al and
personal services (6 percent o f total employment) and manufacturing (5 percent o f total employment)
accounted for most o f the remai ni ng employment. Out o f total worki ng women, onl y 1 percent were
employed as professionals and 0.27 percent worked in administrative and managerial positions. This
l ack o f opportunity for non-agricultural employment, together with the very l o w l abor force
participation rate, imply a considerable loss o f producti vi ty for the Pakistan economy.
46
and Raza (1991); Kazi and Bilquees (1992); Sathar and Ll oyds (1993); and Sathar and Desai (1996).
47 See Khan and Bilquees (1976); Ahmad, Asghar and Khan (1993); and Sarwar and Saleem (1993).
See Cox-Edwards (2004), Alderman and Chishti (1989); Kozal and Alderman (1990); Hami d (1991); Kazi
40
Child Labor
5.24 Chi l d l abor i s widespread in rural Pakistan.48 Accordi ng to the 1999-2000 Labor Force Survey,
10.9 percent o f children age 10-14 participated in the labor force. Labor force participation was much
higher for boys (18.3 percent) than for girls (2.8 percent). In rural areas, 21.7 percent of boys age 10-14
were i nvol ved in the labor force, compared with onl y 2.7 percent o f girls (figure 5.2).
Figure 5.2 Child Labor in Pakistan, 1999-2000
25
.= 20
2
'0
f 15
0
0
al
+
E 10
B
g 5
0
Boys
Total Rural Urban
I
Note: Data are for children ages 10-14.
Source: Labor Force Survey, 1999-2000.
5.25
present a similar picture. An estimated 8.3 percent o f the 40 mi l l i on chi l dren 5-14 years ol d were
worki ng. Mor e than 500 thousand o f these children were 5 to 9 years ol d (2.7 percent o f this age
group). In rural areas, 10.3 percent o f children were working, i ncl udi ng 3.4 percent o f chi l dren f r om 5-
9 years old. Most children that wor k in Pakistan do not attend school: onl y 28 percent o f the worki ng
children were enrolled in schools (equal t o about 7 percent o f the total r ur al popul ati on age 5-14).
Data f r om the 1996 Federal Bureau o f StatisticsiILO-IPEC nation-wide survey on chi l d l abor
5 -26 Chi l d labor force participation rates varied substantially across province, however (figure 5.3).
Participation rates for rural boys 5-14 ranged f r om 1.2 percent in Balochistan t o 23.0 percent in NWFP.
In r ur al NWFP, 9.4 percent o f boys aged 5-9 worked during the week previous t o the survey; compared
t o a national rural average o f 3.7 percent o f boys.
5.27
worked in fami l y enterprises. Many f ar m households prefer t o use own f ami l y labor, even at the cost o f
their children's education (Box 5.1).
Among rural chi l dren across Pakistan, 74 percent o f those who participated in the labor force
48 Grootaert and Kanbur (1995) identify two extremes to define chi l d labor. One in whi ch al l non-educational,
non-leisure time of children i s counted as chi l d labor, and the other whi ch takes i nto account onl y the fill-time
employment in economic activities of the children.
41
Box 5.1: Child Labor in Rural Pakistan
Contrary t o conventional wisdom, chi l d labor i s not confi ned onl y t o very poor households. Using
household survey data for Pakistan and Ghana, Bhalotra and Heady (2001), show that the chi l dren o f
landowners are less l i kel y to be in school than the children o f poor-landless households. They
compared the landless with three different categories o f farmers: margi nal (with less than 0.4
hectares), smal l (0.4 t o 1.2 hectares) and large (above 1.2 hectares). They f ound a positive and
significant association between size of l and and the l i kel i hood o f children worki ng. This paradox
arises because f ar m owners may feel i t di f f i cul t t o supervise the hi red labor, especially in apcul t ur e,
so they prefer t o empl oy their own children, even at the cost of the childrens education.
Yaqub (2002) confirms these findings by describing the tale o f two farmers. Ghul am Ahmed i s a
wealthy farmer wi t h 2.8 hectares in Kar i mo Habi b Haj i vi l l age in the Charsadda district, some 60
kilometers f r om Peshawar in Nor t h West Frontier Province (NWFP). H e grows tobacco, wheat, maize
and sugarcane. Tobacco harvesting, though, i s hard wor k and his chi l dren are vi t al in hel pi ng out. Hi s
elder sons stay at home and help him. He says that i t i s always good t o have f ami l y members wor k o n
the land. By doi ng so one can keep away f r om the hassle o f hiring workers each season, spending
extra money and supervising them. In contrast, Aj ab Khan f r om nearby Mandani village, i s a landless
farm laborer and a father o f four. Bei ng landless, he can forgo his childrens labor in favor o f school.
He says that education i s the onl y wealth that he can give t o hi s chi l dren f or better future
Sources:
Yaqub, Nadeem (2002). Child Labor - Not Onl y a Problem of Poverty, Development and Cooperati on
(No. 1, JanuaryiFebruary 2002, p. 28).
Bhalotra, Sonia and Christopher Heady (2001). Child Farm Labor: The Wealth Paradox. Social
Protection Discussion Paper Series. No. 125. September
Figure 5.3 Child Labor Force* Participation Rates by Province, Pakistan
1999-2000
20
2 15
h
8
0
L
2 10
v
5
0
I
* Children o f age 5-14 years.
Source: Federal Bureau of Statistics / I LO-I PEC 1996 Ch l d Labor Survey,
42
Bonded Labor
5.28
wor ker i s r equi r ed t o provi de wor k at ver y low wages or must wor k f or t he empl oyer in order to pay
back debts at ver y high interest rates. Bonded l abor persists in Paki stan because o f povert y, l ack o f
education, and l ack o f access t o alternative sources o f credi t o n the par t o f t he bonded laborers, as wel l
as t he absence of pol i t i cal wi l l o f l ocal govemment of f i ci al s in the enforcement of exi st i ng l egi sl at i on
banni ng the practi ce (See box 5.2).
Bonded l abor i s l abor that i s t i ed t o an empl oyer in an expl oi tati ve rel at i onshi p under whi ch t he
Box 5.2 Bonded Labor in Pakistan
Bonded l abor exists in various sectors and industries; f or example, agriculture, carpet weaving, br i ck-
kilns, stone quarrying, hotels and restaurants and construction. Debt bondage i s the worst f or m o f bonded
labor, in whi ch workers are bound t o employers by debts owed t o t hem as wel l as t hrough , Because o f
the l ack o f assets, extremely l ow incomes and l ack o f funds the poor who are generally landless tenants
or laborers dependent on the l andl ord or employer f or credit. Due t o l ow repayment capacity, many o f
these households continue to suffer f r om mount i ng debt and continuing bondage in the f or m o f free l abor
f or the l andl ord or employer. Labor bondage continues over generations. When adults gr ow ol d or are
disabled, their children become liable f or the debt. Similarly, when husbands die, the wi ves must j oi n
other families t o repay these debts. In i t s worst form, the bonded laborers are not al l owed t o wor k at other
places wi thout the permission o f the landlord/employer. In some cases, women and chi l dren must remai n
resident on the f arm as collateral f or good behavior.
Religion, ethnicity and caste pl ay maj or roles in determining the burden o f bonded labor. Non- Musl i ms
bel ongi ng t o l ower caste are the worst o f f f ol l owed by Muslims bel ongi ng t o l ower castekribe. Accordi ng
to a report carried out by Australian consultants f or the Government o f Si ndh and the Asi an Devel opment
Bank under the Sindh Rural Development Project: There are some 1.7 mi l l i on landless agricultural
workers (haris) and sharecroppers in f i ve districts o f Si ndh Province (Thatta, Dadu, Badin, Mi rpurkhas
and Umerkot). Most o f these people are in debt bondage. Whi l e bonded labor exists throughout Sindh,
the maj ori t y o f those bonded in the nor t h bel ong t o the Muslim majority, whi l e most of the bonded
agricultural laborers in southern Sindh bel ong t o dalit (untouchable) and to tri bal communi ti es who have
mi grated f r om the drought-prone area o f Tharparkar desert. Poverty and starvation have forced these
communities t o accept the landlords cash advances, and t o be available f or wor k f r om dawn t o dusk.
Bonded laborers may be detained or guarded t o stop t hem escaping and in these situations o f t ot al
ownership rape o f women i s not uncommon [Agrodev (2000)].
Many o f the bonded laborers wor k for no wages. The cost o f the f ood and cl othi ng that they are provi ded
i s added t o their accumulated debt al ong with interest. Thus their debt, in fact, increases on a dai l y basis.
Most o f the indebted poor are forced t o provi de begar (unpaid l abor services). Tr af f i cki ng in bonded
laborers i s a common practice. These bonded laborers are sol d by one l andl ord t o another, usual l y f or a
pri ce higher than the debt they had with their previous l andl ord thereby increasing the overal l debt.
Escaping f r om bondage has serious reprisals, i ncl udi ng threats and kidnapping. Despi te the Bondea
Labor System (Abolition) Act, 1992 and the serious penalties i t prescribes the pol i t i cal and financial
strength o f the landlords, especially in Si ndh al l ows t hem t o continue using bonded laborers with
impunity.
Sources: Nazl i (2003) and Agrodev (2000).
43
5.29 Data o n bonded labor i s scarce. Extreme cases o f exploitation o f laborers are reported by
humanitarian and non-government organizations. Statistical evidence i s di ffi cul t to obtain because o f
the l ack o f accurate data on household debts and terms o f repayment and employment in national
surveys. Moreover, there i s no standard operational defi ni ti on o f what constitutes bonded labor. Using
data f r om the 1990 Agri cul tural Census, Ercelawn and Nauman (2000) calculated that 722 thousand
share cropper households in Punjab and Sindh were in bondage, in the sense that they owed provi ded
unpai d labor (begar) t o their landlords. Of these households, 197 thousand households also owed debts
t o their landlords and were thus counted as bei ng under debt bondage (equivalent t o 17 percent o f the
1.13 mi l l i on landless tenant farmers in the t wo provinces and 1.5 percent o f the 13.27 mi l l i on r ur al
hou~ehol ds~~) . Debt bondage, so defined, was concentrated in Southem Punjab and northem Sindh,
with six districts of Hyderabad di vi si on (Sindh) accounting for around 55,000 debt bonded sharecropper
households.
5.30 Estimates o f bonded labor in Punjab province using data f rom the Agricultural Census
2000 are similar to those for 1990 (Ercelawn and Sohnia Ali, 2003). About 7 mi l l i on persons
had been required to undertake some f orm o f forced labor, and 50 thousand sharecroppers were
in debt bondage (compared t o an estimated 58 thousand in Punjab in 1990), with Mul tan, D. G. Khan
and Bahawalpur divisions in southem Punjab accounting for hal f o f sharecroppers in bondage. Thus,
sharecroppers in debt bondage represented about 9 percent o f total landless tenant farmers in Punj ab.
5.3 1
exploitative l abor and credit arrangements since some o f the debts i ncurred may simply refl ect noma1
extension o f credit by landlords t o sharecroppers at approximate market interest rates. Further wor k i s
needed t o quanti fy the extent o f the problem.
These estimates o f the number o f bonded laborer households l i kel y overstate the extent o f
5.32
1 mi l l i on br i ck kiln workers in Punjab were also under debt bondage. A 2002 survey o f 300 landless
laborers (haris) in Sindh and 300 br i ck kiln workers in Punjab conducted by the Federal Bureau o f
Statistics found that 73 percent o f the br i ck kiln worker households are indebted, with 88 percent o f
these getting loans f r om the employers. Moreover, the maj ori ty o f the indebted households (nearly 83
percent) have inherited their debt; 11 percent o f the indebted households pay bot h in cash and with
labor and 10 percent o f the indebted households repay with labor onl y. One-thi rd o f br i ck kiln workers
reported employer threats and violence. Workers with debts to the employer are often required
prohi bi ted f r om taking other j obs until the debt was repaid.
Bonded labor i s not confined onl y to agriculture. Ercel awn and Nauman (2000) estimated that
Government Labor Policies
5.33
British. This legislation recognized the workers right to f or m trade unions, but with onl y with highly
restricted rights to strike. Accordi ng to the constitution, labor i s a concurrent subject, whi ch means
that it i s the responsibility o f bot h the federal and the provi nci al governments. Labor legislation i s
usually enacted at the federal level, but the responsibility f or enforcing i t belongs to the provinces.
Pakistans labor legislation i s based on an elaborate institutional framework inherited f r om the
5.34
Act 1934; the Shops and Establishment Ordinance 1968; the West Pakistan Industri al and Commerci al
The legislative framework for workers protection exists under four categories: the Factories
49
The figure for the number o f landless tenant households i s calculated f r om HI ES 2001-02 data.
50
Si mi l ar resul t s were f ound in a rapi d assessment survey by an NGO (PILER) of over 100 br i ck kilns around
the urban and peri-urban areas o f the districts o f Hyderabad, Mul tan, Lahore, Rawalpindi, Peshawar and Hari pur
during October t o December 2002.
44
Empl oyment (Standing Orders) Ordinance 1968; and the Industri al Relations Ordinance 1969. These
l aws are, however, not applicable on the agricultural sector51.
5.35
reality, occupancy rights do not exist and al l the tenants are tenants at will wi thout any occupancy
rights -- they can be evicted by the l andl ord at anytime. Even among the titled tenants, the l and
occupancy rights essentially belong t o the male head o f household.
There are, however, various tenancy laws that are applicable onl y to the ti tl e tenants52, In
5.36 Pakistan has a federal minimum wage for unski l l ed workers. I t applies onl y t o i ndustri al and
commercial establishments employing 50 or more workers and i s determined by the Nati onal Minimum
Wage Commi ssi on and requires approval by the Parliament. The minimum wage f or ski l l ed workers,
however, i s set by the provinces. Minimum wages practi cal l y apply onl y to workers in the formal sector
and do not affect agricultural workers. Labor law, applicable nationally, but onl y t o f i r ms with 10 or
more workers, provides for a maxi mum wor k week o f 54 hours for seasonal factories and a maxi mum
wor k week o f 48 hours for other industrial workers, as wel l as for rest periods during the workday.
Some non-wage benefits include offi ci al government holidays, overtime pay, annual and sick leave,
health and safety standards in the workplace, health care, workers children education, social security,
employees ol d age benefits, and a workers welfare fund.
5.37
conditions in r ur al areas, but they do have a significant effect in the dynamics o f employment creati on
in urban areas and thus influence incentives for rural-urban mi grati on and rural l abor markets.
Empl oyment growth in urban areas has been slow, in part because o f an atmosphere of mutual hosti l i ty
and distrust that typify industrial relations. In particular, the unusually high degree o f discretion over
conditions o f employment o f regular workers in specific establishments hel d by provi nci al authorities i s
not conducive t o cooperation between employers and workers. Replacing the discretion o f authorities
on the specific nature o f labor contracts by a few rules on the most common aspects o f these contracts
(minimum age, minimum wage, overtime pay) and the establishment o f procedures t o hel p deal with
possible disputes arising f r om vol untari l y agreed contracts regarding more detailed aspects o f these
contracts woul d hel p build trust in the industrial rel ati on process, and encourage employers t o create
j obs and invest in human capital.
Labor regulations (that mai nl y apply onl y t o urban areas) do not directly alter employment
5.38
wage labor i s often recruited i ndi rectl y through contractors and denied even basic l abor rights rel ati ng
t o worki ng hours, minimum wages and worki ng conditions.
Wage labor in agriculture sector, however, i s not covered by any l egal framework. Agri cul tural
5.39
there exists a law, the Bonded Labor Abol i t i on Act 1992 that prohi bi ts the use o f bonded labor, the
practice not onl y continues but i s even defended by landlords.53 The Government o f Pakistan adopted a
Nati onal Pol i cy and Pl an o f Act i on for the Abol i t i on o f Bonded Labor and Rehabi l i tati on o f Freed
Bonded Laborers in 2001. The ILO Headquarters in Geneva has also developed a programme o n
Al though Arti cl e 11 o f the Constitution o f Pakistan prohi bi ts slavery and forced labor, and
51 Agri cul ture does not come under the classification o f industrial, commerci al or services sector. therefore none
of these l aws are applied t o this sector.
52 Those with l egal l y recognized occupancy rights.
53 The situation o f bonded laborers in Si ndh has deteriorated further, especially when the High Court o f Si ndh
dismissed 94 petitions f or the release o f bonded laborers o n 9 January 2002. the court declares that these were
disputes between landlords and haris over debts and shoul d be settled under the Sindh Tenancy Act 1950.
However, the Court made no reference t o the Bonded Labor Abolition Act 1992 whi ch shoul d take precedence in
this matter and woul d require the loans t o be nul l i f i ed and the bonded laborers t o be freed.
45
bonded l abor f or Pakistan under their Special Act i on Programme to Combat Forced Labor. This
programme i s t o be implemented t o support the Nati onal Pol i cy and Pl an o f Act i on for Bonded Labor,
The preparatory phase o f the ILO programme was i ni ti ated in Jul y 2002.
VI. RURAL CREDIT MARKETS
6.1
producti ve uses i s l i mi ted by the i mmobi l i ty or high transport costs o f the factors, themselves. In
contrast, fi nanci al fl ows through credit markets face extremely l o w physical transactions costs, (though
once invested, the capital goods themselves, such as tractors and storage facilities, may be less mobile).
In r ur al Pakistan however, poor households are often credit-constrained. In formal markets, access t o
credit i s generally limited to landowners, since l and i s the mai n f or m o f acceptable collateral for loans.
Access t o credit in i nformal markets, particularly suppliers and consumers credit i s more widespread,
yet approximately 40 percent o f rural households are credit constrained.
The extent t o whi ch markets for land, water and labor can allocate these factors t o thei r most
Structure of Rural Credit Markets
6.2 For mal sector banki ng in Pakistan i s l argel y urban based. Advances to the r ur al sector
accounted for onl y 3.5 per cent o f advances to the urban sector in 200 1-02. Similarly, rural deposits for
the one year (1 999-00) for whi ch comparable numbers are available are about 28 percent o f urban
deposits (table 6.1). The data imply a net outfl ow o f financial funds f r om the r ur al formal fi nanci al
sector o f Rs (2001-02) 128 bi l l i on in 1999-2000, though investments in rural non-farm activities may
not be consistently shown in the rural advances figures.
Table 6.1 Formal Sector Banking (bn 2000-01 Rupees)
~~
Rural Urban
Year Deposits Advances Deposits Advances
1996-97 24.18 482.86
1997-98 38.37 566.89
1998-99 46.52 582.66
1999-00 169.87 41 -92 614.22 645.93
2000-01 44.79 628.72
200 1-02 50.12 1426.13
Source: Economic Surveys o f Pakistan (2002-03); values deflated with GDP deflator.
6.3 The Zarai Taraqiati Bank Ltd. (ZTBL), (formerl y the Agri cul ture Development Bank o f
Pakistans4), commercial banks, the Federal Banks for Cooperatives (FBCs) and other fi nanci al
institutions are the maj or sources o f formal credit in Pakistan. I nf or mal credit, (i ncl udi ng loans in cash
or kind) derives f r om friends and relatives, commi ssi on agents, input dealers, professional
moneylenders and landlords. Survey data f r om 1995-96 (the most recent year for whi ch such data are
available) indicate that i nformal sector credit i s nearl y three times as large as formal credit in r ur al
Palustan, accounting for about 72 percent o f total r ur al credit (table 6.2). Assuming that formal credit
st i l l accounted for 28 percent o f total rural credit, l endi ng by the ADBP/ZTBL (equal t o nearl y 60
percent o f formal rural credit disbursed), accounted f or onl y about 15 percent o f total r ur al credit in
2001-02. Commercial banks accounted for onl y about 9 percent o f rural credit in 2001-02; but has
increased rapi dl y since that ti me and exceeded ADBP/ZTBL l endi ng in the third quarter o f 2003-04.
Cooperatives and private banks, together, accounted f or less than 3 percent o f total r ur al credit in 2001
02.
54 The Agri cul tural Devel opment Bank o f Pakistan (ADBP) was renamed the Zarai Taraqi ati Bank in 2002.
47
Table 6.2 Sources of Credit in Pakistan, 2001-02
_ _ _ _ ~
Amount
Type of credit (bn Rs) Share formal Share rural
Urban (formal) 1,492.4 96.6% n.a.
Rural (formal) 52.4 3.4% 28.0%
ADBP/ ZTBL 29.1 1.9% 15.5%
Domestic Private Banks 0.6 . . , 0.3%
Cooperatives 5.3 0.3% 2.8%
Commercial Banks 17.5 1.1% 9.3%
Rural (informal)a 134.9 n.a 72.0%
Total (formal) 1,544.8 100.0% n.a.
Total (rural) 187.3 n.a. 100.0%
a Calculated using the share of informal credit in total rural credit (72%) in 1995-96.
n.a. denotes not available. . . . denotes l ess than 0.1%.
Source: Economic Survey o f Pakistan 2002-03 and Rural Credit Survey 1996.
6.4 Thus, the rural credit market in Pakistan continues t o be dominated by i nf or mal sources o f
lending. Bor r owi ng f r om i nformal sources i s comparatively easy in t erms o f access, procedures and
collateral requirements. This translates i nto l ow transaction costs. Furthermore, unl i ke institutional
credit, for whi ch credit i s available i s for onl y l i mi t ed purposes, non-institutional credit i s available for a
wi de variety o f purposes i ncl udi ng consumption, social ceremonies and other non- producti ve purposes
Historical Trends
6.5
by the government and as co-operative credit by the co-operative societies. In order t o reduce the
dependence on i nformal sources, t wo specialized institutions i .e. Agri cul tural Devel opment Finance
Corporation and Agri cul tural Bank were established in the 1950s. These were later merged to f or m the
ADBP in 1961.
Pri or t o 1947, institutional credit in rural areas was mai nl y provi ded as taccavi (distress) loans
6.6 With the increasing use o f fertilizer, pesticides, i mproved seeds, and mechanization, credit
requirements o f the agricultural sector have increased considerably over time. Fr om 1972 t o 2001,
institutional agricultural credit grew at an annual rate o f 15 percent. Formal ADBP loans, the maj or
source o f formal credit, grew at over 17 per cent per annum during this period. Credi t f r om commercial
banks and cooperatives grew at 1 1 and 15 percent per year, respectively.
6.7 Growth of formal sector credit has varied considerable over the last three decades, however, as
a result o f maj or pol i cy shi f t s. Formal agricultural l endi ng quadrupled in real termss5 between 1978-79
(Rs 12.3 bi l l i on) and 1986-87 (Rs 51.7 bi l l i on), due mai nl y t o a large expansion in govemment-
supported, subsidized producti on l endi ng by the commercial banks. At i t s hei ght in 1986-87, subsidized
credit through commercial banks was the maj or source o f rural formal sector l endi ng (figure 6.1).
Commercial bank loans declined dramatically thereafter, after the discontinuation o f this subsidized
credit scheme, however, fal l i ng in real t er ms f r om 23.8 t o 8.6 (2000-01) bi l l i on rupees between 1986-87
and 1988-89.
55 . .
Bi l l i ons o f 2000-01 rupees.
48
6.8
Wi ndow Operati on initiated in 1997 streamlined the application, processing and disbursal o f loans,
parti cul arl y f or smal l farmers. Access t o ADBP/ZTBL loans was also increased through a reducti on in
the minimum requirements o f l and f r om 12.5 acres t o 5.0 acres in 2000. Terri tori al restrictions on
commercial bank lending operations were removed, as wel l .
Total f or mal sector then stagnated until reforms in ADBP policies in the late 1990s. The One
6.9
ADBP/ ZTBL and Federal Banks for Cooperatives f r om the State Bank o f Pakistan, rural formal sector
credit increased by 107 percent in real terms f r om 1996-97 t o 2001-02. The agricultural credit t o
agricultural GDP (at current factor cost) rose f r om 4.9 percent during the 1990s t o 7 percent in 2001-02.
(See Box 6.1. and figure 6.1)
As a resul t o f these pol i cy reforms, and in spite o f an end t o subsidized credit t o the
Box 6.1 Recent Reforms in Formal Sector Agricultural Lending in Pakistan
~~
Zarai Taraqiati Bank Ltd. (formerly Agricultural DeveloDment Bank of Pakistan)
One Window Operation. The ADBP initiated the One Window Operation in 1997, simplifylng
procedures for loans, in order to make credit facilities more easily accessible to small farmers. Under this
operation, undertaken in collaboration with t he Provincial Governments, Revenue Officials and Postal
Authorities, focal point officials provide clients with Agnculture Pass Books on the spot and note land
records in the pass books. The ADBP/ZTBL focal point officials are responsible for sanctioning loans (up
to a maximum o f Rs 50,000), which are disbursed the following day from the concerned bank branch.
Micro-credit. The ADBP initiated a micro credit scheme in July 2000, which targeted drought-affected
farmers. This scheme encouraged the rural poor to engage in profitable commercial activities. Under this
scheme potential borrowers could obtain a maximum o f Rs. 25,000 against a personal guarantee and a
viable security. The range of activities for which loans could be given was expanded to include 136 loan
able items and funding was extended for 18 months at 16 percent per annum.
Land requirements. In order to enhance the access of small farmers to formal credit, ADBP reduced the
requirement o f minimum 12.5 acres o f land to 5 acres o f land. Moreover, in view o f small land holdings
in NWFP the loan limit of Rs. 50,000 for production loan was increased to Rs. 100,000 against personal
security. ADBP also simplified the loan appraisal as well as the application forms.
State Bank of Pakistan (SBP)
Credit for agro-processing and marketing. The agricultural credit scheme has been extended to
encompass the complete value chain of agnculture ranging from inputs, production, storage and
marketing to transport, processing and distribution.
End to subsidized credit for agricultural lending. In October 2000, the provision of subsidized credit
facilities to ADBP/ZTBL and FBC was ended. The minimum average rate on T-bills has been set as the
pricing criteria for all new credit lines to the ADBP/ZTBL and other financial institutions have been
encouraged to lend their funds to ADBP/ZTBL.
Relaxation of territorial limits to commercial banks. Prior to the reforms, SBP assigned territorial
boundaries to commercial banks for lending purposes. Repealing this r ul e was undertaken to increase
competition among banks and give farmers a wider choice in terms o f selecting the potential lender.
Revolving credit facility. Revolving credit was introduced to allow farmers to obtain fresh credit even i f
they have not been able to repay outstanding loans. Formerly, banks could not sanction revolving credit
facility for more than three years, particularly not to those farmers who had been unable to repay prior
debts. Banks would also not demand fresh documents at each renewal.
Source: Malik, Sohail J. 2003b. Rural Credit Markets in Pakistan: Institutions and Constraints.
Background paper
49
Figure 6.1 Growth of Institutional Agricultural Credit (mn 2000-01 Rps)
60,000
50, 000
40,000
30,000
20,000
10,000
0
- ADBP - Cooperati vedFBC --+s-. Commerci al Banks Tot al (Rs. Million)
Source: Ma l i k (1996) and Economi c Surveys (various i ssues)
6.10
(for fertilizer, pesticides, seeds and other producti on needs). Average size o f the 376 thousand product
loans was Rs 61 thousand. The average development loans was nearly twi ce as large (Rs 120
thousand), with the 10,200 loans for tractors averaging Rs 275 thousand per loan, and accounting for
9.6 percent o f total lending (table 6.3).
Near l y 80 percent o f total l endi ng by the ADBP/ZTBL in 2002-03 was f or producti on loans
Table 6.3 Zarai Taraqiati Bank Ltd. (ADBPa) Lending, 2002-03
Value Average
Number of Loans Loan Size
of Loans (mn Rs) Value Share ('000 Rs)
Total Disbursement 427471 29,270 100.0% 68
Production loans
Fertilizer
Pesticides
Seeds
Other production loans
Development loans
Tractors
Tube wells
Dairy farming
Other development loans
376,307 23,111 79.0%
170,215 11,121 38.0%
59,460 4,596 15.7%
139,174 6,652 22.7%
7,458 742 2.5%
61
65
77
48
99
51,164 6,160 21 .O% 120
10,203 2,802 9.6% 275
5,602 970 3.3% 173
26,527 1,162 4.0% 44
8,832 1,225 4.2% 139
Micro-credit 1,965 44 0.1% 22
a ADBP was renamed as Zarai Taraqiati Bank Ltd. in 2002.
Source; Zarai Taraqiati Bank Ltd., viww.adb.or& (March 2004).
50
6.1 1 Insti tuti onal credit i s unequally distributed across provinces: in 1999-00, nearl y 74 percent of
the i nsti tuti onal credit was disbursed in Punjab, whi ch accounts for onl y 59 percent o f the total r ur al
population. The province o f NWFP with 16 percent o f the rural popul ati on received onl y 5 percent o f
the institutional credit. Balochistan, whi ch accounts for 6 percent o f rural popul ati on and where
agriculture i s the maj or source o f l i vel i hood received onl y 1.5 percent o f total i nsti tuti onal credit56.
Si ndh i s the onl y province where the share o f credit i s approximately equal t o i t s share o f total r ur al
population. On a per hectare basis, however, Sindh has the highest average disbursement (Rs 3,978 /
hectare), f ol l owed by Punjab with Rs 2,890, NWFP (Rs 1458 / hectare) and Balochistan (Rs 937 /
hectare).
6.12
posi ti on o f farmers in the respective province and their abi l i ty t o provi de acceptable collateral,
(2) variations in the distribution o f land, (3) the track record or repayments, (4) traditional reliance on
non-institutional sources, and (5) concentration o f agricultural activities [SBP (2002)l.
The wi de variation in l endi ng across provinces i s mai nl y attributable to: (1) the financial
Repayment of Loans
6.13
achieved in the 1980s and 1990s. In 2001-02, nearl y 71 percent o f the current dues were reportedly
recovered (table 6.5). Recovery rates of commercial banks (86 percent) were higher than those of the
ADBPiZTBL (68 percent). Recovery rates o f past due loans are substantially less (36 percent in 2000-
01 and 28 percent in 2001-02).
Loan recovery rates in the formal banki ng system are l ow, though substantially higher than
6.14 Accordi ng t o the State Bank o f Pakistan (SBP, 2002), net agriculture credit (disbursements less
recovery) declined by Rs 1.0 bi l l i on during 2001-02, but the outstanding amount o f credit increased
from Rs 93.4 bi l l i on at end-June FYOl t o Rs 101.5 bi l l i on in FY02, because o f accrued interest on past-
due loans. With l ow recovery rates o f current and past-due loans, the outstanding stock o f agricultural
debt will continue to grow, and will ultimately restrict the banks capacity t o meet the increasing credit
demand f r om the rural sector.
6.15 Gi ven i t s l ow deposit base, ADBP/ZTBL i s increasingly dependent on subsidies f r om the State
Bank o f Pakistan. The rel ati vel y better performance o f commercial banks i s due mai nl y t o their l endi ng
bei ng based on their own deposits and higher recovery rates on current and past due loans.
Structure of Interest Rates
6.16 Li ke other developing countries the i nformal credit market in Pakistan also exhibits a large
degree o f heterogeneity. The structure and operations di ffer f r om regi on t o region. Furthermore, cultural
and religious values prohi bi t the publ i c admission o f charging an expl i ci t interest rate. Much of the
zero interest rate l endi ng i s explained by i mpl i ci t mark-ups (for purchases o f goods and services), other
ti ed transactions and co-insurance. These ti ed credit transactions account for a very large share o f total
rural credit: data f r om the last national Rural Credit Survey (1985), suggest that 90 percent of rural
i nformal credit carried no expl i ci t interest; the interest rate on other loans averaged 22 percent, and the
overall interest rate (both zero-interest and loans with interest) was 2.2 percent (Mal i k, 1999).
6.17
those in the formal sector (table 6.4), though peak interest rates in i nformal credit markets can be
extremely high. For example, Irfan et a1 (1999) reported interest charges o f moneylenders in Punjab
Average interest rates in the i nformal sector have varied between 7 and 1 1 percent higher than
56 The coverage o f commercial banks in Balochistan i s extremely l ow.
51
rangi ng f r om 48 t o 120 percent per year. Such very high interest rates are often tied t o the marketi ng
o f crop.
Table 6.4 Pakistan: Interest Rates in Rural Credit Markets by Source
Year Formal Credit lnterest Rate Informal Credit lnterest Rate
15.3
ADBP 7.2 Money Lenders 18.5
Commercial banks 8.9 Land Owners 10.3
Average 8.2 Average
1985 Average 12.2 (5.7) Average 21.9 (2.2)
ADBP 12.3 (9.6) Money Lenders 33.4 (31 5)
Commercial banks 12.3 (2.6) Land Owners 22.8 (1.4)
1996 ADBP 14 Average 25
2004 ADBP/ZTBL 14
Micro-credit 16
Averages are f or al l sources, weighted by vol ume o f credit.
Figures in parentheses are average o f interest-free and regular loans.
Sources; 1973 Pakistan Rural Credit Survey; 1985 Pakistan Rural Credi t Survey
Mal i k (1999), I r f an et. al. (1999), Zarai Taraqiati Bank Ltd., www.adb.org.pk (March 2004).
6.18
however. I r f an et. al. (1999) found some evidence o f competition in the i nformal credit market, as
indicated by the presence o f more than one lender in a vi l l age -- contrary t o the earlier findings by
Al eem (1990). The higher i nt erest rates in the i nformal sector are due to the opportunity, administrative
and risk costs, as well as the additional cost o f generating funds. Borrowi ng, especially f r om formal
sources, i s the mai n source of funds for the i nformal lenders. Nearl y one-third o f the total funds uti l i zed
in the i nformal credit transactions originate f r om formal credit sources, (70 percent o f the funds f or
agricultural processing units derive f r om i nsti tuti onal sources). On average, i nformal lenders pai d about
19 percent annual interest rate on their funds borrowed f r om i nsti tuti onal sources (5 percent greater than
the ADBP/ ZTBL rate o f 14 percent). Interest rates charged f or inputs varied by product (35 percent f or
pesticides and 8 percent for seeds), with an average interest rate o f 25 percent.
Hi gher interest rates in the i nformal market do not necessarily reflect absence o f competition,
Formal Sector Credit and Mechanization
6.19
to 2002-03, the ADBP/ ZTBL financed purchases o f 399 thousand tractors, an average o f 16,630
tractors per year. As shown in figure 6.2, the number o f tractors purchased with ADBP/ZTBL
financing closely mi rrored domestic producti on of tractors f r om 1986-87 t o 1997-98, poi nti ng t o the
link between availability o f ADBP/ZTBL credit and tractor sales.
The subsidy on formal sector credit has encouraged mechanization in Pakistan. Fr om 1979-80
6.20 Since 1998-99, however, non- ADBP/ ZTBL fi nanci ng o f tractors has become nearly as
important as a source o f credit as ADBP/ZTBL loans. Al t hough the average annual number o f
57 Similarly, Wor l d Bank (2002) reported rural informa1 sector interest rates rangi ng f r om 80 to 150 percent.
52
ADBP/ZTBL tractor loans fel l by 10 percent f r om the 1986-87 to 1997-98 peri od t o the 1998-99 t o
200 1-02 peri od, average annual producti on o f tractors increased by 67 percent, and domestic producti on
o f tractors exceeded the number ADBPi ZTBL financed tractor purchases by 85 percent.
Figure 6.2: ADBP/ZTBL Tractor Loans and Domestic Tractor Production,
1986-87 - 2002103
40
j i 0
19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
86- 87- 88- 89- 90- 91- 92- 93- 94- 95- 96- 97- 98- 99- 00- 01- 02-
Tractor producti on --t Tractors - ADBP loans 1
Farmer Household Access to Credit
6.21 Accordi ng t o PRHS 200 1-02 data, nearl y 80 percent o f cultivator households participate in the
credit market. Access to institutional credit i s highly restricted, however. Few farmers in the sample
fully cover thei r financial needs through formal credit, and those wi thout l and have almost n o access t o
formal sector credit.
6.22
onl y 2 percent o f non-landowners (table 6.5). Three-fourths o f formal sector credit goes t o land-
owners; owner cum tenants receive 24 percent o f formal sector credit. Less than 1 percent of formal
credit goes t o tenants (figure 6.3). In terms o f operated f ar m size, large farms and medi um farms
receive two-thirds o f total formal sector credit.58
Overall, 11 percent o f farmers had obtained formal sector loans, 14 percent o f l and owners, but
* Numerous earlier studies have also f ound that smal l farmers and poor households r el y predomi nantl y on non-
institutional sources f or their credit needs, in spite o f pol i ci es and subsidies designed t o enhance their access t o
institutional credit. See Punjab Economi c Research Insti tute (1986); Appl i ed Economics Research Center (1986);
Scott and Reddi ng (1988); Malik (1989, 1990, 1992 and 1999); and Qureshi and Shah (1992).
53
Table 6.5 Outstanding Loans By Tenure Categories (Formal and Informal)
1 Sample I Households with Informal 1 Formal 1 Both
~~
I Total Sample
1 1590 I 100 I 1239 (78) 1 100 1 1072 1 67 I 4 3 1 2.7 1 124 I 8
Source; PRHS 2001-02 data; Jacoby and Mansuri, (2004b).
Figure 6.3 Formal and Informal Credit by Tenure Categories, 2001-02
Formal Credit Informal Credit
(Distribution across tenure categories)
(Distribution across tenure categories)
Sharecropping Fixed rent
Fixed rent
Sharecropping tenants
Owners cum
tenants
22%
Owners
44%
Owners cum
75%
tenants
27%
I
Source: PRHS 2001-02 data; Jacoby and Mansuri, (2004b).
6.23
sector loans, i ncl udi ng 72 percent o f l and owners and 84 percent o f non-l and non-landowners.
Moreover, even landless farmers (sharecropping tenants and fi xed rent tenants) have access t o i nformal
sector credit, and account for 29 percent o f the value o f i nformal sector lending. The average value o f
i nformal sector loans t o l and owners (Rs 24,400) i s onl y 17 percent greater than the average i nf or mal
sector borrowi ng by tenants (Rs 20,900). Total average borrowi ng by land-owners (i ncl udi ng bot h
borrowers and non-borrowers) i s Rs 29,500, 65 percent greater than total average bor r owi ng by landless
farmers (Rs 17,900). See table 6.6.
Informal sector credit i s much more widespread. 75 percent o f farmers had obtained i nf or mal
Table 6.6 Average Size of Loans to Farm Households, 2002-03
Formal Sector Informal Sector All Loans All Loans*
hhs (RS) hhs (RS) hhs (Rs) hhs mean(Rs)
No. of mean No. of mean No. of mean No. of
Owners 128 81,595 609 20,043 641 35,336 871 26,005
Owners cum tenants 30 100,677 196 37,925 204 51,243 252 41,483
Share tenants 6 12,800 305 19,790 308 19,847 365 16,747
Fixed rent tenants 3 37,500 86 24,678 86 25,986 102 21,910
Total 167 81,759 1,196 23,242 1,239 33,456 1,590 26,070
Farmers with land 158 85,218 805 24,397 845 39,176 1,123 29,478
Landless farmers 9 21,033 391 20,865 394 21,187 467 17,875
"Includes both borrowers and non-borrowers. Al l other data i s for borrowing households only.
Source; PRHS 2001-02 data; Jacoby and Mansuri, (2004b).
54
6.24
(9 versus 47 months). About two-thirds o f i nformal loans (mainly f r om relatives and friends or a
neighbor) have n o specific payment date. Overall, relatives are the mai n source o f i nformal credit,
accounting f or 3 6 percent o f the total number o f i nformal loans (and havi ng among the highest average
l oan size across the different credit sources). Other personal relations, friends and neighbors, are also
an important i nf or mal credit source (1 5 percent).
The average duration of i nformal sector loans i s onl y about one-fi fth that o f formal sector loans
6.25
mai nl y f r om traders, shopkeepers, and landlords of sharecropping tenants. Typi cal l y, these woul d take
the f or m o f ferti l i zer or other inputs advanced at the beginning o f an agricultural season.
Al most 80 percent of informal loans are in cash. The remaining are in-kind loans comi ng
6.26
purpose. Other agricultural equipment and animals are used as collateral in 14 and 8 percent o f the
loans, respectively. In more than a third o f the cases, collateral i s not in the f or m o f agricultural assets;
residential or commercial property accounts for 10 per cent and personal guarantees f r om relatives
friends and employers for 17 per cent. Thus, access t o formal credit typi cal l y requires ownership o f
vi si bl e assets, mai nl y l and and farm equipment, or at least a strong personal connection with someone
who probably owns such assets. By contrast, the vast maj ori ty o f i nformal loans (90 percent) requi re no
collateral.
Al l f or mal loans require collateral, with about a third of loans using agricultural l and f or this
Access to Credi t
6.27
o f households reported that they did not need credit or found credit t o be too expensive. The remai ni ng
38.1 percent o f cultivators were access rationed in the formal market, in the sense that they wanted
formal sector credit at the terms offered, but were unable t o obtain it. However, among the 11.3 percent
of households that had formal sector loans, 23 percent (i.e. 2.6 percent o f the entire sample) faced credit
limits on the size o f the l oan at the given interest rate. Thus, a total o f 40.7 percent o f households were
ei ther access or quantity rationed (table 6.7 and figure 6.4).
Al t hough onl y 11.3 percent o f households had loans in the formal sector; another 50.6 percent
6.28 In general, access t o credit in the i nformal sector was greater: 76 percent o f farmers had some
t ype o f l oan (consumption, producti on or other loan) f r om i nformal sector sources, and 18.1 percent o f
farmers were able to borrow but chose not to. Only the remai ni ng 6.2 percent were access rati oned in
the i nformal market. Another 11.7 percent o f households faced binding non-zero limits on bor r owi ng
in the i nformal sector, so that a total o f 17.9 percent o f r ur al households were access or quantity
rationed in the i nformal market (figure 6.5).
Micro-credit Programs and Savings Mobilization
6.29
micro-finance as part o f i t s poverty alleviation strategy. Mi cro-fi nance i s disbursed as small loans -
through the ADBP/ZTBL, the Khushal i Bank and the Pakistan Poverty Al l evi ati on Fund (PPAF). In
2003, micro-finance credit by these three institutions equaled Rs. 1,442 mi l l i on (2.5 percent o f total
institutional credit). Two-thi rds o f this micro-credit was disbursed through the PPAF, and 3 1 percent
through the Khushal i Bank; ADBP/ZTBL lending accounting f or onl y 3 percent o f the total (table 6.8).
In all, 57 thousand micro-credit loans were advance, with an average l oan size o f Rs 25.3 and 23.7
thousand per l oan through the PPAF and Khushal i Bank. The average l oan size in 2003 through ZTBL
was considerably larger (Rs 41.6 thousand), though this i s considerably less than their average l oan size
in 2002 (Rs 126.3 thousand for onl y 135 loans).
In recent years, the Government o f Pakistan has placed considerable emphasis on devel opi ng
55
41
0
41
606
0
606
647
40.7%
186
0
186
98
0
98
284
Table 6.7 Credit Rationing in Rural Pakistan 2001
Access or
Total %of Total Non- Access Quantity
'ormal Credit
Sample Sample Borrowers Rationed Rationed
iorrowers
Not Quantity Rationed
Quantity Rationed
lon-borrowers
Able to borrow
Not able to borrow
'otal
'ercentage of Total
iformal Credit
lorrowers
Not Quantity Rationed
Quantity Rationed
Jon-borrowers
Able to borrow
Not able to borrow
-otal
180
139
41
1410
804
606
1590
100.0%
1205
1019
186
385
287
98
1590
1 1.3% 0
8.7% 0
2.6% 0
88.7% 1410
50.6% 804
38.1% 606
100.0% 1410
--- 88.7%
75.8% 0
64.1% 0
11.7% 0
24.2% 385
18.1% 287
6.2% 98
100.0% 385
--- 24.2%
0
0
0
606
0
606
606
38.1%
0
0
0
98
0
98
98
6.2% 'ercentage of Total 100.0% 17.9%1
iource; WB-PIDE 200 1 Rural Household Survey; Jacoby and Mansuri (2004a).
Table 6.8 Major Micro-credit Programs in Pakistan, 2003
PPAF* Khusali Bank ZTBL** Total
Number of Loans (thousands) 37.7 18.7 1 .I 57.5
Value of Loans (mn Rs) 951.4 443.0 47.7 1,442.0
Average Size (thousand Rs) 25.3 23.7 41.6 25.1
* Pakistan Poverty Al l evi ati on Fund.
** Zarai Taraqiati Bank Ltd., formerl y Agri cul tural Development Bank of Pakistan.
56
Households
wi th
outstanding
loans
(181)
Farmers
Households Households wi t h
wi th b outstanding loans who face
outstanding no quanitty restrictions
loans (139)
(1 80)
Households
wi th no loans
Households that are NOT
access rationed in the formal
credit sector ad who do not
in the
sample
1590
Figure 6.5 Credit Rationing in the Informal Market
face any quantity restrictions
that are NOT
access (804)
rationed in the
formal credit
sector (804) Households that have formal
Households
that are access
Households with
no outstanding
b rationed
Households that are not
current borrowers but are
not access rationed in the
formal credit sector (287)
Households that are
not current
not access rationed
Farmers borrowers but are
restrictions (41)
Households that are access
b
Specification I Specification 2 Specification 3
Households Households wi th
wi th outstanding loans
outstanding (1205) \ b
Households wi t h
outstanding loans who face
no credit l i mi ts (1019)
Households that are
Households with + access rationed
loans (335)
no outstanding (98)
informal loans but face
quantity restrictions (1 86)
Households that are
b
57
6.30
trade and commerce, through a network o f development existing NGOs (Box 6.2). A recent
evaluation o f the PPAF noted that i t s operation now covered 72 districts and a large percent o f the
l oan recipients (44%) were women.
Most o f the PPAF loans were given for livestock and for enterprise development and
Box 6.2 Pakistan Poverty Alleviation Fund (PPAF)
The Government of Pakistan set up Pakistan Poverty Alleviation Fund (PPAF) in February 1997 in
order to enhance the access o f the poorer households and communities to socio-economic services.
PPAF was set up as a private, non-profit, limited company, with the ai m o f reaching the poor and
disadvantaged communities in both rural and urban areas through NGOs and the Community Based
Organizations (CBOs). PPAF funds for income generation activities and improved community
physical infrastructure are disbursed through i t s t hr ee mai n units 1) Credit and Enterprise
Development Unit; 2) Community Physical Infrastructure Unit; and 3) Human and Institutional
Development Unit.
Mi cro credit loans have increased from Rs. 35.6 mi l l i on to Rs. 2,814 mi l l i on between FY2000 and
FY2003. The bulk of the micro credit i s disbursed under the Credit and Enterprise Development Unit
wi th disbursements in FY2003 o f Rs 1,314 million, 47 percent of the total PPAF disbursement. This
amount was equivalent to 4.8 percent of the total institutional loans disbursed during that year. In
2003, the 119,196 borrowers received an average loan o f Rs. 8,816. Nearly 44 percent o f loans went
to women. Most o f the loans (38%) were disbursed for livestock, followed by agriculture (32%), and
enterprise development and commerce and trade (30%).
According to the PPAF Annual Report (2003), by the end o f FY2003, a total o f 218,702 individuals
had availed o f Rs 2,8 14 mi l l i on in PPAF financing since the inception of the program, in 72 districts
through 37 partner organizations.
Gallup Pakistan (2003) evaluated the functioning of PPAF through a survey o f 1700 borrower and
non borrower households in 140 community organizations o f 17 districts in al l four provinces o f
Pakistan. This study found that borrowing households were better of f than those that had not
borrowed. On the average their incomes and consumption had increased and there was an
improvement in their personal and business assets, housing facilities and other amenitieshervices,
and in their social status (especially for women borrowers). Borrowers were not able to obtain as
much credit as they wanted, however. In the survey sample, the mean value o f loans received by the
borrower group was Rs. 9,138, 53 percent o f their desired amount (Rs. 7,136). According to study,
the mean return on investment for the loans was approximately 30% per annum.
6.3 1
done. Apart f r om questions related to the effectiveness o f targeting and coverage o f the
programs, there remains a maj or concern regarding sustainability o f these programs. By setting
ambitious overall targets and using the l ocal contacts o f the NGOs, the programs have achieved
an impressive growth to date (though the share in the total institutional disbursements i s st i l l quite
small - l ess than 5 percent). However, rural credit programs in Pakistan have hi stori cal l y had a
poor record o f repayments. As l ong as large inputs o f donor and other funds are available f or on-
l endi ng by these programs, and the possi bi l i ty o f turning over loans exists, i t wi l l be di f f i cul t t o
assess the actual default rates on these loans.
No comprehensive study of the overall i mpact o f these mi cro-credi t schemes has yet been
58
6.32 In addi t i on t o these mi cro-credi t schemes, r ur al devel opment proj ects i mpl ement ed
t hr ough t he Aga Khan Rur al Support Programme (AKRSP) also i ncl ude savings and credi t
programmes based on a system of col l ecti ve savings and l oans i ntermedi ated t hr ough vi l l age
organi zati ons (VOs) (Box 6.3). This system mi ni mi zes t he transaction costs f or borrowers. Du e
t o peer gr oup pressure, the transparent nature o f the credi t operations, and group guarantees for
loans, r epayment rates f or loans are nearl y 100 percent. The empl oyment and i ncome i mpact,
especi al l y f or t he poor, has been qui te substantial. Gi ven the success o f the AKRSP, t he Nat i onal
Rur al Support Programme (NRSP) was started in 1991 and since 1992 has had di rect support
f r om the Gover nment o f Pakistan.
Box 6.3 Aga Khan Rural Support Programme (AKRSP)
The Aga Khan Rural Support Programme (AKRSP) was i ni ti ated in 1982 f or the purpose o f
i mpl ementi ng a rural development programme in the Nort hern Areas o f Pakistan. The essential
elements o f the AKRSP are the establishment o f effective Vi l l age Organizations (VOs). Each VO
starts i t s operation with one grant-assisted productive physical infrastructure project. The womens
VOs focus o n various aspects o f raising womens producti vi ty and welfare. Examples o f the
activities in whi ch these organizations are engaged are: (i) introduction and dissemination o f
i mproved varieties and cul ti vati on techniques f or crops; (ii) i mproved livestock husbandry practices;
and (iii) new productivity-raising technology f or apricot-drying tents, nut-cracking machines, and
butter-chumers. AKRSP helps the village organizations t o obtain access t o i nsti tuti onal credit by
acti ng as a l oan guarantor through the promot i on o f savings by members, whi ch serve bot h as a f or m
of l oan collateral f or credit and provi de supportive marketi ng services f or different products.
The savings and credit programme o f the AKRSP i s based on a system o f collective savings and
borrowings. Each member deposits hisiher savings with the Manager o f the vi l l age organization.
The collective savings o f the Vi l l age Organization are deposited in a single account hel d at a
commercial bank. Credit facilities are extended in a similar manner. The vi l l age organization takes
out a single collective l oan and disburses sub-loans t o members according t o i ndi vi dual s credi t need.
This system mi ni mi zes the transaction costs f or borrowers in bot h savings and borrowi ngs. Due t o
the peer group pressure, the transparent nature o f the credit operations, and the group guarantees f or
loans, the repayment rates f or loans are almost 100 percent. The employment and i ncome impact,
especially f or the poor, has been quite substantial.
Based on substantial positive results f r om group-based savings mobilizations and credit programmes
by the AKRSP, a Nati onal Rural Support Programme (NRSP) was started in 1991 and expanded in
1992 with a grant f r om the Government o f Pakistan. NRSP i s bui l di ng a network o f grassroots
organizations whi ch pl an and undertake their own development. I t uses a development strategy
whi ch mobilizes communities and maximizes the use o f l ocal resources, similar t o that o f the Aga
Khan Rural Support Programme (AKRSP) and the Orangi Pi l ot Project (OPP). The evaluations o f
the AKRSP and OPP show that the poor have been successfully hel ped by the credit and other
related interventions in a fi nanci al l y sustainable manner. Nonetheless, poor households parti ci pati ng
in the program st i l l l ack enough credit and other fi nanci al resources t o purchase thei r own land.
Source:
Mal i k, Sohail J. 2003b. Rural Credit Markets in Pakistan: Institutions and Constraints. Background
paper for Pakistan Rural Factor Markets Study.
59
Implications of Credit Constraints for Productivity and Incomes
6.33
reduces f ar m producti vi ty (measured as gross value o f output per unit o f land). Control l i ng for
various pl ot-l evel characteristics i ncl udi ng pl ot size, l and value, topography, i rri gati on and soi l
type, as wel l as crop mix,59 the value o f yields o f the 41 percent o f households who faced credit
rati oni ng in the formal sector was 9 percent l ower than the value o f yields o f non-credit rationed
households. Households who faced credit rati oni ng in bot h the formal and i nformal sectors
(approximately 17 percent o f al l households) had a 23 percent reduction in value o f yi el ds6'
Econometri c analysis o f plot-level data suggests that l ack o f access t o credit significantly
6.34 This reducti on in farm producti vi ty for credit-constrained farmers i s l i kel y due t o l ower
input use (seed, fertilizer and tractor rentals), as wel l as fewer long-term investments in l and or
equipment. In addition to this effect on yields, l ack o f access to credit may prevent some farmers
from cul ti vati ng more l and (through rental markets). The net effect on area cultivated i s zero,
however, unless the l and rented in woul d otherwise be fal l ow.
59 The regression includes dummy variables f or the type o f crop cultivated (cotton, sugarcane, wheat and
rice).
6o The figures cited are ordinary least squares estimates; correcting f or endogeneity o f access t o credit, the
estimated effect o f rati oni ng rises t o 26 and 45 percent, respectively, though the latter fi gure i s not
statistically significant. See Annex 1.
VII. IMPLICATIONS FOR INCOME DISTRIBUTION AND
POVERTY REDUCTION
7.1
reduction depend not onl y on increases in agricultural and non-agricultural output, but o n who
receives the addi ti onal income, as determined by ownership or access t o factors o f producti on.
Gi ven the skewedness o f the distribution o f l and and the predominance o f own-fami l y labor in
agriculture, the direct gains o f agricultural producti on accrue mai nl y t o large (and t o a lesser
extent) small farmers. Gains t o rural landless households depend on the extent t o whi ch the r ur al
non-agricultural sector spurs employment and i nformal sector capital eamings.
The effects o f inefficiencies in factor markets on income distribution and poverty
7.2 Empi r i cal analysis o f India, Chi l e and other countries suggest that these gr owt h linkage
effects, combi ned with reductions in the real pri ce o f food, have l ed to significant reductions in
r ur al poverty. Trends in growth and rural poverty in the 1970s and 1980s in Pakistan show
similar patterns. However, rural poverty in Pakistan did not decline in the 1990s in spite o f high
rates o f agricultural growth, cal l i ng i nto question the extent t o whi ch rural factor market reforms
wi l l lead t o maj or reductions in rural poverty, particularly through the pathway o f agricultural
growth. This chapter explores possible reasons for the l ack o f correlation between agricultural
growth and r ur al poverty reduction in the 1990s, examines the structure o f factor incomes o f rural
households, and presenting simulation results o f the effects o f broad-based agricultural growth
and specific factor market reforms on household incomes.
The Puzzle of Persistent Rural Poverty and High Agricultural Growth
7.3 Numerous studies have shown a link between agricultural producti vi ty gr owt h and
poverty reducti on (Ahl uwal i a 1978, Mel l or 1976 and 1978, Hazel1 and Ramasamy, 1991) through
reductions in food prices and growth in employment. Moreover, econometric evidence suggests
that agricultural growth i s more effective in reduci ng r ur al poverty than i s i ndustri al growth,
though this relationship may not hol d when ownership o f l and i s highly skewed (Raval l i on and
Datt, 2002, Ti mmer 1997 and Thirtle 2001; see Box 1).
7.4
agricultural GDP growth was 3.9 percent per year during this period, (3.2 percent f or crops).
Rural poverty (headcount) declined steadily f i om 49.3 percent in 1984-85 t o 36.9 percent in
1990-91 t o 33.4 percent in 1993-94. Si mi l arl y the poverty gap declined from 11.9 percent in
1984-85 to 7.8 percent in 1990-91 to 6.4 percent in 1993-94.
The experience o f Pakistan in the 1980s fi ts this general pattem. Average real
7.5
continued agricultural growth. Real agricultural GDP rose by 4.6 percent per annum, yet the
percentage o f rural poor living bel ow the poverty l i ne remained essentially unchanged between
1990-91 (36.9 percent) and 1998-99 (35.9 percent), and even rose t o 38.9 percent in 2001-02, a
drought year .61
For the decade o f the 1990s overall, however, r ur al poverty rates stagnated in spite o f
61
regions of Pakistan, though problems of sample size and sample design prevent defi ni ti ve conclusions.
Wor l d Bank (2002) reports rural poverty headcounts f or 1998-99 that vary l i t t l e between Punjab (34.7
percent) and Sindh (37.1 percent), but are higher in NWFP (46.5 percent).
Survey evidence suggests that incomes and the l evel o f povert y (headcount) vary substantially across
61
Basmati
Wheat Wheat flour Rice Average
1970-74 1.04 1.02 1.09 1.05
1975-79 1.05 1.05 1 . I O 1.06
1980-84 0.87 0.95 1 . I 4 0.98
1985-89 0.86 0.95 1.08 0.96
1990-94 0.82 0.94 1.01 0.93
1995-99 0.91 0.99 1.04 0.98
2000-03 0.94 1.05 1.08 1.02
Figure 7.1 Real Prices of Maj or Food Grains in Pakistan, 1970-2003
1.30 I
1
0 1.10
1.00
0.90
7 0.80
0
II
Q)
0.70 1
Note: The three commodi ty i ndex consists o f an average o f wheat, wheat f l our and basmati ri ce prices.
62 Dat t and Raval l i on (1998) showed that a decline in the real pri ce o f maj or f ood staples was a maj or
factor in reductions in rural poverty in I ndi a in the 1970s and 1980s.
62
Total Poor Poor Poor HHs
HHs (mns) HHs (percent) HHs (mns) % of total Rural Poor
Medium and Large Farmers 0.59 24.1% 0.14 2.3%
of which farmers w/o irrig. 0.11 31.9% 0.04 0.6%
Small Farmers 3.83 38.3% 1.47 23.7%
of which farmers wlo irrig. 1.06 32.0% 0.34 5.5%
Landless Farmers 1.33 60.5% 0.81 13.0%
of which farmers w/o irrig. 0.17 49.9% 0.08 1.3%
Rural Agric Laborers 1.32 69.0% 0.91 14.7%
Rural non-farm non-poor 3.33 0.0% 0.00 0.0%
Rural non-farm poor 2.87 100.0% 2.87 46.3%
Total Rural 13.27 46.7% 6.20 100.0%
7.8
sufficient to expl ai n the l ow correlation between agricultural growth and rural poverty reducti on
in Pakistan in the 1990s. In addition, the skewed structure o f ownership and access t o factors o f
producti on in r ur al Pakistan, whi ch are in part due to distortions in factor markets, may have also
contributed t o the disconnect between agricultural growth and poverty reducti on in the 1990s.
Moreover, these structural factors have important implications for future efforts t o reduce rural
poverty.
Sl ow actual overall agricultural growth and a r i se in the prices o f maj or staples may be
7.9
farm households (table 7.2). Rural non-farm households account for 46 percent o f the rural poor;
agricultural laborer households comprise 15 percent o f the rural poor. Though there i s substantial
poverty among small l andowni ng farmers (38 percent are poor), this group accounts f or onl y 24
percent o f total rural poor households. Landless tenant farmers (61 percent o f whom are poor)
account f or another 13 percent o f the rural poor. Farmers wi thout i rri gated l and account for onl y
7 percent o f r ur al poor households.
Accordi ng to HIES 2001-02 data, more than 60 percent o f r ur al poor households are not
of which farmers wlo irrig. 1.34 34.2% 0.46 7.4%(
Source: HIES 2001-02.
7.10
economy and labor income for the poor (table 7.3 and figure 7.2). Crop i ncome (own-farm)
accounted for onl y 23 o f household income, and onl y 18 percent o f i ncome f or the poorest 20
percent o f households. Li vestock accounted f or 14 percent o f total r ur al household incomes, with
l i t t l e variation across expenditure quintiles. Thus, agricultural farm i ncome was onl y 37 percent
o f total rural incomes. Wages and salaries accounted for 26 percent o f total reported r ur al
household income across al l rural households; for the poorest two quintiles, the l abor i ncome
shares were 37 and 34 percent, respectively. Forei gn remittances accounted f or 6 percent o f
incomes o f the top expenditure quintile, but onl y 0.5 percent o f incomes o f the poorest quintile.
HIES (2001-02) data on rural incomes also highlight the importance o f the r ur al non-farm
63
Average monthl y income (Rs)
Wages and Salaries
Table 7.3 Rural Household Income By Source and Expenditure Quintile (2001-02)
I Total I Ql 1 Q2 I Q3 1 Q4 1 Q5
6031 4259 4967 5582 6269 8914
26.33 37.45 34.37 29.21 22.95 17.72
Crop Production
Livestock
Non-farm activities
Property income
Social Insurance Benefi ts including
22.94 17.11 18.30 21.61 25.95 26.65
13.53 12.34 12.35 13.74 13.93 14.29
13.49 15.30 14.20 13.44 13.34 12.44
9.14 6.26 7.08 7.64 9.07 12.55
1.44 0.72 0.99 1.45 1.78 1.75
Pension
Gift Assistance
Foreign Remittances
Domestic Remittance
Other Sources
Figure 7.2 Rural Household Income Sources by Quintile, Pakistan 2001-02
3.16 3.98 3.24 2.91 2.77 3.22
3.13 0.48 1.38 2.68 2.97 5.67
5.43 4.14 6.19 5.94 5.91 4.89
1.40 2.23 1.91 1.39 1.33 0.83
100%
90%
80%
E 70%
y 60%
0
E Other income
0 Gifts, transfers, pensions
0 Wages & Salaries
E Livestock
40%
30%
10%
0%
b
f!
t5 20%
1 2 3 4 5
Expenditure Quintile
7.1 1
incomes in the HIES are substantially understated. Total annual private per capita consumption
in the HIES data i s onl y Rs 11,400, 62 percent o f the nati onal accounts figure (Rs 18,500), (figure
7.3). In order to obtain an estimate o f the l evel and structure o f household incomes that was more
consistent with agricultural producti on and national accounts data, a social accounting mat r i x
( S A M ) was constructed using data f r om these and other secondary sources (see Annex 3). The
results suggest that farm incomes are even more highly skewed than indicated in the HIES or
PRHS, and that the importance o f non-farm incomes in total r ur al household incomes i s generally
understated in the household survey data.
Compared with the national accounts data, however, total household expenditures and
64
Figure 7.3 Pakistan: Per Capita Incomes and Expenditures 2001-02
35
30
25
& 20
L
e
L
>
8 15
P
2 10
5
0
Rural Urban Total
PRHS Income
MNat i onal SAM Pnv. Cons.
HIES Expend.
MNational Accounts Pnv. Cons.
7.12
Production, national accounts, and MINFAL the estimates f r om the S A M indicate that returns t o
l and account f or 55 percent o f value added in crop producti on and 27 percent o f total agricultural
income (including livestock, fishing and forestry). Returns t o operated l and on medi um and large
farms alone account for 21 percent of total crop value added. Total returns t o l abor are 27 percent
o f value added in the crop sector, but the share o f hi red labor in the sector value added i s onl y 5
percent.
Based on data f r om the Agri cul tural Census, Agri cul tural Price Commi ssi on Cost o f
7.13 Gi ven this large share of l and incomes in agricultural value added and the skewed
distribution o f land, medi um and large l and owners (those with 12.5 acres or more), who account
for 10 percent o f agricultural households, receive an estimated 32 percent o f agri cul tural incomes
7.14
percent of total incomes for agricultural households (41 percent o f total popul ati on in Pakistan).
Incl udi ng r ur al non-agricultural households (3 1 percent o f national population), the share o f
agricultural incomes in total rural incomes i s onl y 37 percent. Thus, incomes f r om r ur al non-
agricultural activities, i ncl udi ng processing and trade o f agricultural products, smal l industry,
construction and general trade and transport services account for 63 percent o f total r ur al
incomes, and essentially al l o f non-transfer incomes for about 40 percent o f the r ur al popul ati on
(table 7.4).
However, agricultural incomes (i ncl udi ng livestock) generally account f or only 56
65
Table 7.4 Pakistan Rural Agricultural Incomes
PRHS PRHS SAM SAM
Agric Inc Agric Inc Agric Inc Agric Inc
Per Capita Share Per Capita Share
('000 Rs) (percent) ('000 Rs) (percent)
Medium and Large Farms
Small Farms
Landless Farmers
Rural Agric Workers
Rural Non-Farm Non-Poor
Rural Non-Farm Poor
15.7 83.5 29.9 57.2
6.1 67.9 8.6 54.8
7.2 87.7 5.3 59.7
2.2 53.1 5.5 53.1
0.3 1.9 0.1 0.4
0.2 6.3 0.2 4.5
Total Rural 6.1 69.7 5.6 37.2
Source: Pakistan S A M 2001/02; Pakistan Rural Household Survey 200 1/02.
Rural Agric Households 7.1 74.8 9.6 55.9
Agricultural Growth and Rural Income Distribution
7.15 The contribution o f agricultural growth to increased rural incomes i s not l i mi t ed t o farm
incomes, however. Increases in agricultural producti on generally i nvol ve increased demand for
agricultural inputs, processing and marketi ng services. Also, as household incomes rise,
consumer demand for bot h urban and r ur al products and services increases. To the extent that the
supply o f goods and services i s elastic, these increases in demand can spur increases in
producti on and further increases in demand. (See box 7.1.)
7.16 These mul ti pl i er effects o f agricultural growth and producti vi ty gains f r om factor market
reforms can be estimated using a semi-input-output model, based on the Pakistan S A M described
above. The model assumes that output o f tradable goods (major crops, cattle products, most
industrial products, i s inelastic, and does not expand due t o increases in demand. For these
products, increased demand results in increased net imports. For elastically supplied products,
(minor crops, poultry, and services), increased demand i s assumed t o induce increases in output.
7.17 Simulation results o f a 10 percent increase in the output o f al l maj or crops (wheat,
basmati and IRRI rice, cotton and sugar cane) suggest that the largest gains o f increased
agricultural crop producti on accrue to large and medi um l and owners, whose incomes ri se by 7.2
percent. Incomes of small farm owners and pure tenants also rise by about 4.6 percent. Due t o
mul ti pl i er effects, incomes o f non-farm r ur al household groups also ri se by 3.4 percent, on
average. The poorest r ur al household groups (agricultural laborers and r ur al non-fann poor (29
percent o f the rural population) reap onl y 6.7 percent o f the total i ncome gains, and their incomes
rise by onl y 2.6-4.1 percent. Much o f the gains in incomes accrue t o owners o f capital in both
rural and urban areas.
7.18
dairy products) are more evenly spread out gi ven the di stri buti on o f ownership o f livestock.
Overal l incomes r i se by 4.5 percent, and smal l farmers and landless agricultural households (who
also have significant l i vestock income) ri se by 9.7 t o 10.9 percent.
Gains f r om a 10 percent increase in large l i vestock producti on (mai nl y cattle, goats and
66
Box 7.1 Agricultural Growth and Rural Poverty
Tamil Nadu, India Despite concerns that the green revol uti on technology f or ri ce (improved seeds,
increased f ert i l i zer use and irrigation) woul d lead t o increased income inequality, most rural
household groups benefited from increased ri ce producti on in the 1970s and early 1980s, (Hazel1 and
Ramasamy eds., 1991). Household surveys o f farmers indicated that, although the first adopters o f the
ri ce technology tended t o be larger farmers, by the early 1980s small farmers in villages with access t o
i rri gati on had also adopted the new technologies at the same rate as large farmers. Land distribution
remained essentially unchanged, and agricultural wage earnings for agricultural laborers increased
(though real agricultural wage rates did not increase).
Moreover, increased ri ce producti on l ed to substantial rural growt h linkages, adding an additional 0.87
rupees o f value added f or every 1 rupee of value added f r om additional ri ce production. One-hal f o f
these mul t i pl i er effects were due to increased demand f or agricultural inputs, marketi ng and
processing services; the remainder derived f r om increased consumer demands as household incomes
rose.
Survey results showed that real incomes o f smal l paddy farmers and landless laborers rose by 90 and
125 percent, respectively, between 1973174 t o 1983/84. Incomes o f non-agricultural households also
rose by 55 percent, due in part t o the growt h linkage effects emanating f r om agricultural growth. Real
income gains o f large paddy farmers were onl y 18 percent, due to increased costs o f fertilizer and
labor. Notabl y, non-paddy farmers with no access t o i rri gated l and saw real i ncome gains of onl y 17
percent.
Similarly, analysis of state-level data on growt h and poverty in I ndi a (Datt and Ravallion, 1998)
shows that agricultural producti vi ty growt h f r om 1958-1994 pl ayed a maj or rol e in reduci ng poverty.
During this period, agricultural output per acre o f net sown area grew by 2.91 percent per year,
contributing t o higher real wages for agtlcultural laborers (whi ch grew by 2.84 percent per year) and a
decline in the real pri ce of food. (The pri ce o f f ood relative t o agricultural laborers consumer pri ce
i ndex f el l by 0.15 percent per year from 1976-94, after havi ng increased by 0.62 percent per year f r om
1958-75.) Hi gher farm yields f or small producers also contributed di rectl y t o their incomes, bot h
di rectl y through increased value of output and i ndi rectl y through increased employment.
7.19 Thus, whi l e agri cul tural gr owt h has substantial benefi ts for low i ncome farmers,
expansi on in out put (and processing) o f maj or crops resul ts in smal l er gains to r ur al non- f ar m
households on average, in spite o f si gni fi cant mul t i pl i er effects. These l i nkage effects o f
agri cul ture are not l arge enough t o substantially rai se i ncomes of t he r ur al non- f ar m poor f or t wo
maj or reasons: 1) the size o f Pakistans agri cul t ural sector rel at i ve t o t ot al GDP and t he r ur al non-
f ar m economy has decl i ned over time, 2) Pakistans agri cul t ural l abor market i s segmented, with
much f ar m l abor der i vi ng from own- f ami l y l abor.
7.20
0.234 in 1970 t o 0.091 in 2000 (table 7.5). As a result, assuming an unchanged value-added
mul ti pl i er, the di rect effects of a 10 percent gai n in maj or cr op pr oduct i on i s smaller: equi val ent
t o 2.3% of GDP in 1970, but onl y 0.9% o f GDP in 2000. Li kewi se, t he r el at i vel y smal l er size o f
the i ni t i al shock and t he l arger share o f i mpact o f the mul t i pl i er effects o n the rest o f t he economy
i s also smal l er (4.6% of GDP in 1970 compared with 1.5% of GDP in 2000).
Over ti me, the share o f maj or crops in t ot al GDP in Paki st an has f al l en dramati cal l y, f r om
67
Table 7.5 Implications of Changes in Economic Structure for Agricultural Multiplier
Effects
1960 1970 1980 I 990 2000 2002
Agriculture Share of GDP 0.458 0.389 0.306 0.246 0.240 0.232
Share of major crops in GDP 0.231 0.234 0.176 0.130 0.091 0.078
10% shock to agric (as YO of GDP)
Value added multiplier
% change in total GDP
% change in non-agriculture
4.6% 3.9% 3.1% 2.5% 2.4% 2.3%
1.5 1.5 1.5 1.5 1.5 2.5
11.5% 9.7% 7.6% 6.1% 6.0% 8.1%
12.7% 9.5% 6.6% 4.9% 4.7% 7.6%
10% shock to major crops (as % of GDP) 2.3% 2.3% 1.8% 1.3% 0.9% 0.8%
Value added multiplier 1.5 1.5 1.5 1.5 1.5 3.3
% change in total GDP 5.8% 5.8% 4.4% 3.2% 2.3% 2.7%
Yo change in non-major crops 4.5% 4.6% 3.2% 2.2% 1.5% 2.8%
Note: The value added mul ti pl i er i s defined as the additional change in value added generated di vi ded by
the value added o f the i ni t i al producti on gai n (shock). The 2002 value added mul t i pl i er i s deri ved f r om
SIO-model simulations; mul ti pl i ers f or al l other years are assumed t o be equal t o 1.5 based o n Hazel1 and
Roe11 (1983), Mel l or (1992) and Mel l or and Gavi an (1999).
Source: Dorosh, Ni azi and Nazl i (2004).
7.21
(the average agricultural multiplier i mpl i ci t in the S I 0 model), a 10 percent output increase in
producti on o f maj or crops in 2002 results in onl y a 2.8 percent gain in output of other sectors,
about 40percent less than the estimated change in non-major crops assuming a multiplier of 1.5
i n 1970.
Moreover, even if the value added mul ti pl i er has increased substantially over ti me t o 2.5,
7.22 The i mpl i cati on i s that growth l i nkage effects have a smaller i mpact on GDP growth and
rural poverty reduction today than in 1970, (unless the gains in non-agricultural incomes go
disproportionately to the rural non-farm poor). Agri cul tural growth st i l l has positive impacts on
incomes o f the rural poor, but these effects are not as large, relative t o the size o f the economy, as
they were three decades ago. Even with agricultural growth o f 3.9 percent per year (the hi stori cal
average f r om 1975 to 1990, a rapi d peri od o f real agricultural GDP growth) and the hi gher
growth multiplier o f 2.5, non-agricultural i ncome growth in 2002 woul d be about 2.9 percent,
implying a per capita growth rate o f less than 1 .O percent per year.
7.23 The second reason for the rel ati vel y smal l size o f the mul ti pl i er effects on r ur al non-farm
incomes i s that the simulations assume that unski l l ed labor markets are segmented i nt o own-farm
labor, agricultural wage labor and non-agricultural unski l l ed labor markets. Thus, in the
simulations, most of the gains in total agricultural l abor incomes accrue t o f ar m households
(reflecting the average distribution o f agricultural l abor incomes in the PRHS surveys). If t hi s
pattern s t i l l holds for margi nal increases in agricultural output in the future, increased agricultural
output wi l l resul t in rel ati vel y l i ttl e increase in demand f or landless agricultural l abor. The
simulations also assume r ur al and urban markets f or unski l l ed non-agricultural l abor are
68
integrated. Thus the gains in non-agricultural unskilled labor incomes are split across bot h urban
and rural household^.^^
7.24
various househol d groups. If non-agricultural labor incomes are concentrated among onl y a
segment o f r ur al non-farm poor households, the percentage gains in income o f this segment o f
households wi l l be larger, (and the gains to other rural non-farm poor households correspondingly
smaller).
Fi nal l y, i t should be noted that the simulations show the average gains in incomes for the
Factor Mar ket Reforms
7.25
size o f i mpact on overall producti vi ty in the agricultural sector (table 7.6).
The i mpact o f factor market reforms on rural poverty depends in large measure on the
7.26
coul d lead t o substantial benefits for share-croppers, but rel ati vel y small benefits for most o f the
rural poor. Assuming that replacing share-cropping with fi xed rent tenancy leads t o an increase
in producti vi ty of the former share-croppers by 18 percent, (because o f increased labor effort, as
suggested by the econometric analysis in chapter 3), woul d onl y increase average incomes o f
small-farm renters (1 1 percent of the rural population) by 3.0 percent. Since the size o f this
producti vi ty shock i s small relative t o the rural economy, there are onl y mi ni mal effects on
average incomes o f other household groups, even accounting for linkage effects t o the rural non-
farm economy.
Improvements in producti vi ty arising f r om a shift f r om share-cropping t o fi xed rents
Table 7.6 Simulated Distributional Impact of Factor Market Reforms
Base Tenancy Credit Increased Water
Incomea Reform Reforms Productivity
Large Farmers-Sindh 19.1 0.2 5.3 15.4
Large Farmers-Punjab 64.1 0.2 5.0 10.7
Large Farmers-0th Pak 10.8 0.2 3.1 7.6
Med Farmers-Sindh 44.6 0.2 6.4 9.9
Med Farmers-Punj ab 146.0 0.3 5.6 8.4
Med Farmers-0th Pak 35.6 0.3 5.8 9.0
SmFarmers-Sindh 57.6 0.4 3.9 6.1
SmFarmers-Punjab 3 18.9 0.4 4.4 6.6
SmFarmers-0th Pak 125.0 0.3 2.7 4.2
SmFarm Renters-Sindh 43.7 4.0 4.0 6.2
SmFarm Renters-Punjab 46.0 2.8 4.3 6.3
SmFarm Renters-0th Pak 15.0 2.7 2.8 4.4
Agric Workers-Sindh 20.8 0.2 2.2 3.3
Agric Workers-Punjab 68.2 0.2 2.4 3.6
Agric Workers-0th Pak 9.5 0.1 1 .o 1.5
Non-farm Non-poor 400.8 0.3 2.3 3.4
63 PRHS data indicate that rural non-f arm households have a l ot o f underemployed l abor (per capita non-
agricultural labor incomes are f i ve times hi gher f or rural non-f arm non-poor households compared with
rural non-farm poor households). Gi ven that the margi nal shares used t o allocate l abor incomes are the
average shares f r om the SAM, the i ncome gains to rural non-f arm poor households may be underestimated.
69
~ ~~ ~~
Base Tenancy Credit Increased Water
Income" Reform Reforms Productivity
Non-farm Poor 134.4 0.3 2.3 3.3
Urban Non-poor 1744.0 0.2 1.1 1.7
7.27 Easi ng credit constraints on small farms, assuming a 35 percent producti vi ty gain o f
formerl y credit-constrained small farmers, has larger effects, rai si ng small farm incomes on
average by about 3.8 percent. Because o f positive linkage effects, the non-agricultural rural
economy also expands and other households benefit, as wel l . Incomes o f most other poor rural
household groups r i se by about 2.3 percent.
7.28
percent) as a result o f provi si on o f water t o tailenders in canal systems (through physi cal
investments or establishment of water markets), incomes o f small farmers and tenants r i se by 5.8
percent, and incomes o f agricultural laborers and rural non-farm poor households ri se by 3.1 and
3. 3 percent, respectively.
Under optimistic assumptions regarding increases in national crop producti vi ty (14
Implications for Growth and Poverty Reduction
7.29 Because o f data uncertainties and simplifying assumptions used, the above analysis o f the
effects o f increases in agricultural output on incomes in Pakistan agriculture illustrates onl y the
broad order o f magnitude o f the effects. Moreover, these simulations show onl y the static resul t s
o f factor market changes, not dynamic effects o f i mproved incentives on private investments and
market development. Nonetheless, the broad structure o f rural production, distribution o f l and
and other factors o f production, and structure o f household incomes are reflected in the analysis.
7.30 Two broad conclusions emerge. First, the l evel and distribution of the benefits o f
improvements in factor market efficiency depend cruci al l y on the magnitude o f the induced
producti vi ty shock and the ownership of the assets i nvol ved. In spite o f mul ti pl i er effects,
reforms related t o share-cropping are l i kel y t o have onl y smal l overall impacts on rural incomes
in aggregate in the short run, though the benefits t o tenants coul d be significant. Credit market
reforms and improvements in water availability have potenti al l y larger effects on the overal l r ur al
economy. Second, the linkage effects o f expansion in tradi ti onal crop agriculture, though
important, may not be adequate t o substantially raise incomes o f agricultural laborers and the
rural non-farm poor who l ack significant capital resources. Thus, in the absence o f a change in
the structure o f rural incomes and employment or significant gains in the rural non-farm economy
apart fi-om agricultural growth-induced linkage effects, targeted interventions to agricultural
laborers and the rural non-farm poor wi l l l i kel y be needed t o rapi dl y reduce the poverty o f these
groups.
VI I I . CONCLUSIONS AND POLICY IMPLICATIONS
8.1 Wel l -functi oni ng factor markets can help maxi mi ze producti vi ty by provi di ng a mechanism
t o allocate al l factors o f producti on t o their most productive use. Significant inefficiencies in factor
markets in Pakistan, however, limit agricultural producti vi ty and rural income growth, (especially
l ack o f water markets to allocate water t o farmers and l and wi thout sufficient access t o water, and
underemployed labor). Experience in other countries suggests that the l ong-term gains in
producti vi ty f r om improvements in the functi oni ng o f factor markets coul d be large, parti cul arl y
gi ven the inter-linkages across factor markets, resulting in significant potential gains for the rural
poor.
8.2
Rur al factors in Pakistan that are most rigid in supply (land, water) and i nvol ve the highest transport
costs, have the thinnest markets, and face the greatest pol i ti cal constraints t o reforms. These
contrasting characteristics to a large extent determine limits on factor market effi ci ency and feasibility
o f pol i cy changes (table 8.1).
Markets for land, water, labor and credit vary considerably in their performance, however.
Land
8.3 Land i s at the heart o f Pakistan agriculture and the rural economy. Arabl e l and i s essentially
fi xed in supply in the absence o f maj or new investments in i rri gati on and drainage. As a fi xed factor
in a rel ati vel y labor abundant agriculture, returns t o l and are estimated t o be about hal f of incomes
(value added) f r om crop agriculture. The unequal distribution o f land, therefore, i s a maj or reason
behi nd the high income inequality in r ur al Pakistan. Moreover, in part because o f inefficiencies in
l and administration and l and markets, l and i s rarel y bought and sold, helping t o perpetuate the highly
unequal distribution o f land, hamper labor mobi l i t y o f farmers who want t o sell land, and reduce
returns t o fami l y labor. The skewed l and distribution and inefficiencies in l and markets also reduce
access to credit f or non-landowning households, since l and i s the maj or acceptable f or m o f collateral
in formal credit markets (table 8.2).
8.4 Evidence on the impacts o f l and market imperfections on efficiency o f l and use are mi xed,
however. Agri cul tural census data indicate that crop choice does not vary substantially by f ar m size.
Similarly, there i s l i ttl e variation in croppi ng pattem by tenure status. Nonetheless, survey data on
crop i ncome per cultivated area in Punjab suggest that incomes per cultivated acre o f farms less than
5 acres in size are nearly double those o f farms 25 acres or more. Mor e recent econometric evidence
of producti vi ty by pl ot that correct for some l and qual i ty characteristics, however, suggest rel ati vel y
small negative economies o f scale in production, i.e. that a doubl i ng o f operated area leads t o a 10-13
percent reduction in producti vi ty.
8.5 Three major attempts at redistributive l and r ef or m in Palustan have fai l ed (most recently in
1977), and l and reform has neither pol i ti cal support, nor the backi ng o f Isl ami c rel i gi ous authorities.
Because o f these severe institutional constraints t o traditional redistributive l and reform, more
feasible options to increase access t o l and by poor households i nvol ve a win-win approach. Land
purchase schemes that include grant components f or the poorest landless households are one example,
though fiscal costs coul d limit the scale o f such programs. Pol i cy measures to increase access t o l and
also include increased access to credit to enable poor households to purchase land, l and taxation t o
reduce incentives for hol di ng l and for speculative purposes, 64 and measures t o i mprove the effi ci ency
o f l and sales and rental markets.
64 Increases in l and taxes (and water charges) woul d reduce incentives f or hol di ng o f l and f or speculative
purposes, and encourage greater l and sales.
E
73
8.6 Admi ni strati ve reforms in the enforcement o f existing norms and regulations, i ncl udi ng
enforcement o f contracts and the rights o f tenants, and lifting restrictions for rentals woul d also hel p
i mprove the functi oni ng o f l and markets. Si mpl i fi cati on o f complicated l egal procedures that result in
l ong delays in proceedings and a backl og o f cases woul d reduce l and transactions costs. Poor
households are at a particular disadvantage in cases brought before ci vi l courts, since they often
cannot afford t o pursue these cases. Possible steps include limits on the number o f appeals,
procedural reforms, alternative confl i ct resolution mechanisms, and barri ng o f the j uri sdi cti on o f ci vi l
courts in l and revenue matters. Improved dissemination o f i nformati on on l and prices and transactions
woul d also enhance efficiency o f l and markets (box 8.1).
Box 8.1 Improving the Enforcement of Contracts in Land Administration in Pakistan
Enforcement o f land contracts remains a major problem in Pakistan. Complicated legal procedures
result in l ong delays in proceedings and a backlog o f cases. The poor are often losers in this process
since they have l ess resources.
Some possible remedial measures to improve the enforcement o f contracts in the Land Administration
are as follows:
On-the-spot inspections to establish facts on the ground and summary methods o f disposal to
avoid l ong protracted litigation. Adequate safeguards need to be maintained so that the
process i s open and transparent.
Reduction in the number o f ti ers in whi ch a case can be heard. For most revenue cases, the
last court o f appeal should be the Deputy District Office (DDO) and not the Board o f
Revenue (as i s the case presently).
Barring the jurisdiction o f ci vi l courts in revenue matters. Frequent intervention by the ci vi l
courts on the pretext o f enforcing legal procedures(and determining legal rights o f the
contesting parties) works to the disadvantage o f the poor who lack resources to pursue these
cases.
Fixed time limits for each category o f land dispute and imposing a l aw on the postponement
o f hearing by revenue courts on administrative grounds to help expedite the settlement o f
dispute.
Improvements in the poor quality o f land records and clarification o f ambiguous laws.
Establishment of a system of open courts and grievance hearing days by senior officials to
reduce the transaction costs o f obtaining legal redress.
AdaDted f r om S. Oureshi (2003).
8.7
security o f tenure. Wi thout secure rights t o thei r land, farmers not onl y have less incentives for
investment, but also devote resources t o defending their rights. Lack o f secure ti tl e also reduces
access t o l and by landless households through rentals by increasing the risk o f landowners who might
otherwise rent out more land. In addition, banks are reluctant t o l end money using l and as collateral
because they do not trust the current recordi ng system. Questions regarding the val i di ty and
enforceability o f titles also make i t harder t o buy and sell land. Computerization o f l and records, as
tested in a recent pi l ot project in Punjab, i s one opti on for establishing clearer l and records and
reduci ng fraudulent dealings by l and administration Officials (box 8.2)
Improvements in l and records coul d also enhance the effi ci ency o f l and markets and increase
74
Box 8.2 Exampl es of Land Ref or m and Land Titling Projects
Brazi l : Parti ci patory Negotiations and Market-Assisted Land Ref or m
The Northeast, accommodating one-half o f al l Brazi l i an poor people and two-thirds o f al l rural poor
people, i s vulnerable to drought and has a relatively poor resource base. Addi t i onal constraints t o
i mproved investment and producti vi ty in agriculture include ineffective financial systems and
distorted l and distribution. Studies have shown that f ami l y f ar ms in Br azi l are more productive and
l abor intensive t han large farms. The highly distorted l and ownership pattem i s the result o f economic
distortions, i ncl udi ng subsidized agricultural credit, high inflation, and inappropriate tax provisions.
Past approaches t o l and reform, based on centralized government-administered expropriation and
redistribution, have had l i mi t ed success. As a result, the government was interested in experimenting
with faster, cheaper, and l ess confl i cti ve approaches t o land reform.
What' s innovative? A market-based approach t o l and r ef or m with negotiations made di rectl y
between willing buyers (poor beneficiaries) and willing sellers, with financing f or purchases made
available t hrough a government fund.
PROJECT OBJECTIVES AND DESCRIPTION
The objective of the Land Ref orm and Poverty Al l evi at i on Project was t o raise agricultural output and
increase poor f ami l y incomes by provi di ng i mproved access t o l and and funds f or complementary
investment subprojects planned and implemented by communi ty associations. The project
experimented with a program o f market-assisted l and r ef or m in whi ch beneficiaries are gi ven access
t o fi nanci ng f or the purchase o f suitable lands. The purchases are negotiated between willing sellers
and willing buyers. Fi ve states were selected f or participation in the pi l ot proj ect based on the severity
of the landlessness probl em and conditions f or successful implementation (that i s, the immediate
avai l abi l i ty o f l and in the market and the capacity o f the State agencies t o i mpl ement the project). The
project had f i ve components:
A l and purchase fund to finance l and purchases.
Communi t y subprojects (small matchi ng grants t o communities f or investment projects,
technical assistance, and start-up).
Insti tuti onal strengthening (technical assistance and trai ni ng at the state level).
Project administration, supervision, and moni tori ng.
Impact evaluation and dissemination by the federal government.
Communi t y associations consisting o f landless rural workers or rural workers owni ng l and sufficient
onl y f or subsistence farming selected suitable l and and negotiated i t s purchase wi t h wi l l i ng sellers.
Fol l owi ng negotiations, the associations consulted with the State Land Institute t o conf i rm that the
ti tl e was clean and that the negotiated purchase pri ce was consistent with market conditions.
Communities then presented their project t o the State Techni cal Unit (STU), whi ch veri f i ed the
el i gi bi l i t y (based on agricultural ski l l s) o f the beneficiaries. At this stage, beneficiaries were el i gi bl e
for credit f r om the Land Purchase Fund with credit i ni t i al l y gi ven f or a 10-year peri od with a three-
year grace peri od at the government l ong-term interest rate.
Lao PDR: Second Land Ti tl i ng Project. The Laos Land Titling Project (LTP II), co-financed by
AusAID, i s the second phase o f the l ong-term l and titling program ai mi ng at the development of the
l and administration capacity t o support economic development and poverty reducti on goals. The
project i s aligned t o the government's Nat i onal Gr owt h and Poverty Eradi cati on Strategy Program
Box 8.2. Cont ' d.
75
(NGPSEP), approved by the National Assembly in October 2003. The project responds to the
findings o f the I-PRSP that highlighted the importance o f land policy and land management to provide
the basis for poverty reduction and economic growth. The project will build upon the achievements
and experiences o f the fi rst Land Titling Project (LTP). LTP I1 will provide secure land ti tl es in peri-
urban (mostly agricultural land) and urban areas, providing incentives for land holders to invest in
land development and in sustainable agricultural practices and enabling greater access to credit for
agriculture inputs and land improvement. The project wi l l help build govemment capacity to
coordinate the development of the national land pol i cy and regulatory framework, and wi l l support the
formulation and adoption of key land policies for land administration and management.
Punjab: Computerization of land records project. In Punjab, land disputes are pri mari l y due to
fraudulent dealing because the records are not clear and patwars (land administration officials) often
accept informal payments. Moreover, banks (which are currently capital rich), are reluctant to lend
money using l and as collateral because they do not t r ust the current land recording system. To address
these problems, the govemment of Punjab initiated a land records project as a pi l ot in one district
(Kasur) in 1996/97, but because o f administrative problems, major project activities did not begin
until 1988 when the Director of Land Records o f the Board o f Revenue was put in charge. Progress
has been slow, however: in a five year period from 1998 to 2003, land records had been computerized
in onl y 601 o f the 641 revenue estates in the district. In August 2003, the pi l ot was transferred to the
Kasur district government. In late 2003, the provincial government decided that a new model, and
therefore a new pi l ot (in Lahore city), woul d be required to accelerate the process o f computerization
of land records. Progress with the new model has been quite rapid, and as a result, the provincial
govemment has decided to scale up the project to other districts.
Source; World Bank. 2004b. Implementing Reaching the Poor: A progress report on Rural Strategy
Implementation for the World Bank Board o f Executive Directors; Hanid Mukhtar, World Bank Pakistan
office.
Water
8.8
losses, and annual supply depends mai nl y on weather (and l ong-term investments in water storage).
Transactions costs, i ncl udi ng the management costs i nvol ved in adjusting fl ows o f canal water, have
l i mi t ed water trading and market transactions t o l ocal areas t o date. I nf or mal water markets for
groundwater, however, have been shown t o significantly increase agricultural producti vi ty who l ack
access to their groundwater sources. Development o f water markets for surface i rri gati on (whi ch are
currently highly localized, with most transactions on a barter basis), coul d si mi l arl y increase
producti vi ty o f canal water by al l owi ng markets t o hel p allocate water t o i t s most producti ve use.
Al though surface water, unl i ke land, i s transportable, there are often maj or conveyance
8.9
equi ty of water use in Pakistan agriculture, with or wi thout the establishment o f water markets,
however. First, in order t o increase accountability for Operations and Maintenance, management of
distributaries andor mi nors coul d be transferred to Farmer Organizations (FOs), permi tti ng
assessment, collection and retention o f abiana (water charges) by the FOs. Recent administrative
reforms giving greater control t o farmer organizations (Water Users Associations at the mi nor l evel
and Water Course Associations at the water course level) in some parts o f Sindh have shown promi se
in reducing water theft by closing i l l egal outlets and thereby increasing access t o water f or tail-end
farmers. This suggests that increased l ocal i nvol vement in canal water management can i mprove the
Several institutional changes coul d bring about maj or improvements in the effi ci ency and
76
equity o f water d i ~ t r i b u t i o n . ~ ~ In addition, i mproved l ocal maintenance o f water channels by
Farmers Organizations has contributed t o increased efficiency o f water use.
8.10
crop choice, peri odi c measurements o f the actual rate o f water f l ow at various poi nts in the water
course coul d be made. Havi ng accurate i nformati on on water fl ows woul d enable farmers t o make
more i nformed decisions regarding crop choice and area irrigated. For example, given a shortage o f
available water, a farmer might choose t o maxi mi ze his overall revenues through reduci ng total area
cultivated, so that crops grown on the remai ni ng area receive adequate water. 66 Open access to the
written rules o f the water rotati on for farmers woul d also i mprove transparency.
Second, to increase transparency and enable more i nformed decisions on area irrigated and
8.1 1 Third, the current system i s supply-driven and mostl y managed by provi nci al Departments o f
Irri gati on. Reforms in the institutional arrangements for allocation of water coul d be made t o create a
more demand-driven system that woul d better respond t o the needs o f the farmers. Options include
a) a system o f Water Course Associations, Water Users Associations and Area Water Boards
(AWBs), as i s currently bei ng implemented in four o f Pakistans 43 canal command areas , and b)
professional canal management.
8.12
above: i) establishing legal tradable water rights at the national and provi nci al levels; ii) strengthening
l ocal institutions (such as Water Course Associations and Water User s Associations, or professional
canal management agencies) t o enable them t o serve as brokers in water markets, hel pi ng t o match
buyers and sellers o f water.
Development o f effective water markets woul d require t wo steps beyond those outlined
8.13
the i ni ti al allocation o f rights already i mpl i ci t in the warabandi system o f water r ~t at i on. ~ These
water rights woul d need t o include an expl i ci t formul a for allocation o f water rights in years o f
shortage, as wel l as address environmental i ssues (see box 8.3)
Legal establishment o f tradable water rights woul d formalize these water markets, defi ni ng
65 In the command area covered by the Left Bank Area Water Boar d in Sindh, where t ai l end farmers had
not received water in t hr ee years, 48 i l l egal direct outlets serving an area o f about 25 thousand hectares
were closed in early 2004.
66 This principle may appl y t o Pakistan agriculture as a whole: higher agricultural incomes might be
achieved through a contraction in total i rri gated area so that crops gr own on the remai ni ng i rri gated area
received opti mal amounts o f water.
67 Pakistani Law treats al l surface water as provi nci al property. Under the Pakistan Constitution, whi l e the
Federal government i s responsible f or regul ati on and development o f inter-state rivers and ri ver valleys,
provi nci al governments are responsible f or water supplies, i rri gat i on and canals, drainage and
embankments, water storage etc. Under the de facto interpretation o f these responsibilities, the power o f the
provinces has emerged as pre-eminent and water has come t o be perceived as a provi nci al subject.
Establishment o f tradable water rights woul d thus come under the purvi ew o f the provinces, t hough federal
legislation mi ght be required, i ncl udi ng amendment o f the Canal and Drainage Ac t (1873) whi ch ties water
allocations t o specific pl ots and also ties l and sales with water sales, and the Land Reforms Ac t (1972)
whi ch makes landowners responsible f or water charges.
77
Box 8.3 I mpor t ant issues regardi ng t radabl e wat er rights
1.
2.
3.
4.
5.
6.
7.
Source
Method for initial allocation of water rights: historical water use (e.g. Mexico) or historical
use combined wi th redistribution o f large historical shares (e.g. Chile)
Pr i or o r proportional water rights: appropriative rights system that allocates water f i r st to
those who have held the rights the longest period o f time (e.g. California) or shares over a
variable fl ow or quantity o f water (e.g. Mexi co and Chile)
Consumptive use and ret urn flows: tradable water rights are full diversion rights wi t h no
rights to return flows (Mexico and Chile) or limited transferability o f water rights maintaining
third-party rights o f retum flows (California)
Protection against negative indirect economic effects: negative indirect economic effects
from water trading have been small or non-existent in California, Chile and Mexi co
Protection of the environment: laws prohibiting water transfers with unreasonable impacts
on wildlife (California); quality o f discharge for non-agricultural uses must be specified in
water rights (Mexico)
Rol e of water user associations: in Chile, W A S own and manage the physical
infrastructure, monitor allocation o f water, approve water transfers, provide a forum for
conflict resolution; in Mexico, water rights are generally i ni ti al l y provided to WUA whi ch
then grant water rights to their members
I nfrastructure required for tradable water rights: In Chile, water i s usually only measured in
the mai n channels; elsewhere, simple proportional division devices are used to divide the
water in shares proportional to canal flow.
Rosegrant, Schleyer and Yadav, 1995.
Rosegrant, Mark W., Renato Gazmuri Schleyer and Satya N. Yadav. 1995. Water policy for effi ci ent
agricultural diversification: market-based approaches. Food Policy, Vol. 20, No. 3, pp. 203-223.
8.14
water control above the water course l evel in the current Indus basi n system, however. Because
there i s essentially no storage capacity within a water course (and l i t t l e control o f water f l ow i nto
the water course), i ndi vi dual farmers are technically not permi tted t o refuse t o take their t ur ns in
the distribution system. Likewise, water control at the distributary and higher levels i s also
greatly l i mi t ed by the absence o f storage capacity and adequate number o f control structures
(gates) t o regulate water levels.
Any system o f tradable water rights woul d need t o account for the mi ni mal degree o f
8.15 Thus, institutional mechanisms t o enforce limits on net water transactions or new
investments in storage and control structures woul d be needed t o insure adequate drainage (e.g.
that farmer sales o f water rights did not l ead t o excessive water fl ows downstream) and minimum
water f l ow vel oci ty in the canals (to avoi d siltation). (box 8.4) Overcomi ng these physical
constraints o f the canal system t o permit trading beyond the boundaries o f a water course through
investments in water storage capacity and control structures or coordination o f the vol ume o f
water trades becomes progressively more di ffi cul t and expensive as the l evel at whi ch water
transactions are permi tted (i.e. water course, distributary, mi nor) increases.
78
~~ ~
Box 8.4 Infrastructure Constraints for Development of Water Markets in Pakistan
The physical layout (geography) of the Indus River Basin canal system and existing infrastructure limit
the degree o f water control and the scope for water markets outside a given water course (the tai l end
o f the i rri gati on delivery system). In this run ofthe river system, storage capacity i s onl y about 13
percent o f annual average water flow. (By comparison, storage capacity in the controlled storage
system o f the Colorado River basin in the United States i s about five times annual average water flow.)
Thus, there i s very limited capacity to control total annual water fl ow in the Indus River basin.
Moreover, there are very few control structures (gates) to regulate water levels and water fl ow velocity
must be maintained above a minimum rate to avoid siltation o f canals.
In the absence o f storage capacity and control structures, water trading i s largely limited to within a
water course where the warabandi system o f water rotation i s in place. Because there i s essentially no
storage capacity wi thi n the water course (and l i t t l e control o f water fl ow into the water course),
individual farmers are technically not permitted to r ef use to take their turns in the distribution system.
Informal trades and sales within water courses do occur, but these exchanges do not affect the total
inflow of water or water use in the water course.
In contrast with the Indus River basin, the geography and infrastructure o f the river basins in countries
wi t h widespread markets enable far greater water control. In Mexi co and the US. river basins with
developed water markets are control storage systems. In Chile, there are numerous relatively small
river basins with their own water markets, lessening the problems of coordination and water control.
Establishing water markets for surface water woul d require both changes in laws to establish water
rights separate from ownership of land, reliable measurement system (including water f l ow
measurement devices/ personnel to measure/systems o f monitoring / farmers organizations - water
users associations), and the capability o f controlling water flows.
Developing water markets above the water course l evel in Pakistan woul d require investments in
storage (dams) and control structures (gates) so that water flows could be diverted in accordance with
water transactions. Such investments at the minor l evel may be feasible, permitting water transactions
within a minor. Establishing effective water control at distributary or higher levels, however, woul d
require sizeable investments in storage and control structures.
8.16 As shown by the experience o f Chile, increasing the effi ci ency o f water use (in the
Chilean case through the establishment o f water markets) can be an integral part o f pro-poor
agricultural growth. Trade and exchange rate pol i cy r ef or m (including reductions in tariffs,
removal o f non-tari ff barriers, and liberalization o f forei gn exchange markets), together with
other macro-economic reforms, provi ded incentives f or agricultural exports. Devel opment o f
high value agricultural products (frui ts, vegetables, and wine) for export t o Northern hemisphere
( of f season) markets was facilitated by establishing security o f l and titles (that encouraged
investments in planting orchards, forestry, and irrigation) and water markets that hel ped t o
allocate available water to high value crops. Processing o f the agricultural exports was labor-
intensive, increasing wages o f unski l l ed labor and contri buti ng t o reduced poverty. (box 8.5).
8.17
water markets may be smaller than in other countries, unless an institutional mechanism f or
insuring that adequate drainage and water f l ow levels can be devised. Nonetheless, benefits o f
more efficient allocation o f water through i nsti tuti onal reforms, with or wi thout water markets,
Gi ven the infrastructure constraints in Pakistan, the potential gains f r om establishing
79
coul d st i l l be substantial, if they are combined with other measures to promote agricultural
diversification, i ncl udi ng strengthening security o f l and titles, publ i c investments in r ur al
infrastructure (roads and electricity), private investments in processing and storage, and
establishment o f market l i n k s to export markets.
Box 8.5 Factor Market Reforms and Agricultural Diversification in Chile
In Chile, the establishment o f tradable waters was linked to reforms in the land markets in 1975,
under whi ch l and which had been collectivized in 1966 was re-privatized. Former landowners
received 40 percent o f their original land along with the proportional right to water historically used
on this land. The remaining 60 percent o f the land and the water rights were allocated to former
works on the lands.
These reforms, along wi th a broad economic reform including trade and exchange rate liberalization,
led to the creation o f water markets in the early 1980s, increased water use efficiency, and rapid crop
diversification. Reforms in water markets resulted in increased scarcity value o f water, and a large
increase in area planted to f r ui t s and vegetables, which require less water per gross value o f output
than do field crops. Aggregate water use efficiency in agriculture increased by an estimated 22-26
percent between 1976 and 1992 (Frias, 1992; Munita, 1994).
Because o f the intensive use o f labor in processing o f f r ui t s and vegetables, particularly for the
export market, agricultural diversification has led to substantial rural poverty reduction. Usi ng data
from 1990 to 1996, Lopez and Anriquez (2003) estimated that a 4.5 percent in agricultural output in
Chile leads to a 8-1 1 percent decrease in the poverty headcount, mai nl y by raising real wages o f
unskilled workers.
Source: Rosegrant, Schleyer and Yadav, 1995; pp. 208, 210.
Frias, J.L. 1992. Evolucion Reciente de l a Industria del Agua en Inglaterra. Francia y Chile, McKinsey
and Company, Mexico.
Munita, J. 1994. Aumento de Eficiencia en e l Us0 del Agua por Incorporacion de Nuevas Tecnicas y
Arrendamientos Temporales. Universidad de Chile, Santiago.
Lopez, Ramon and Gustavo Anriquez. 2003. Poverty and Agricultural Growth: Chile in the 1990s. Paper
prepared for the Roles of agriculture International Conference, 20-22 October, 2003. Rome, Italy.
Labor
8.18 Unl i ke the markets for l and and water, rural labor markets are generally characterized by
demand constraints, rather than supply constraints, as evidenced by substantial underemployment.
There i s considerable labor mobi l i ty, in spite o f high transactions costs i nvol ved in j ob search and
especially in migration. However, formal sector employment in rural areas i s mi ni mal , and over
80 percent o f agricultural labor and most o f r ur al non-agricultural labor i s self-employed. Female
participation in labor markets remains l i mi ted, though, and j ob skill levels for bot h mal e and
female labor are generally l ow.
8.19
want to leave farmi ng t o sell or rent out their farm land. This woul d require greater security o f
property rights, and faci l i tati on o f l and transactions that are presently sti fl ed by .the absences o f a
val i d title, ri sks o f court challenges, and high regulatory and transactions costs (for example,
stamp duty plus registration fee plus capital tax amounted to 16% o f the average market pri ce o f
A better functi oni ng l and market coul d promote labor mobi l i ty, hel pi ng farmers who
80
l and in 1995).@ The case o f Poland suggests that removal o f impediments to l and transactions
can facilitate l abor market mobi l i ty. (box 8.6).
Box 8.6 Factor Market Reforms and Labor Mobility in Poland
A major concern as Poland prepared to j oi n the European Uni on was that a large part o f the
countrys agricultural sector was uncompetitive with imports from other EU countries. Moreover,
a decline in farm incomes could have especially severe impacts on the poor, given the
predominance o f small farms and the high incidence o f poverty in rural areas in central and
southern Poland.
Background studies of land, labor and credit markets, combined with analysis of rural household
survey data showed l ow mobi l i ty out o f farming, however, particularly among small farmers
(owning 2 hectares o f less). One reason for this lack o f mobi l i ty was that households were
required to hol d land in order to qualify for the highly subsidized agricultural pension scheme,
whi ch was more remunerative than the non-agriculture pension scheme. A second reason for the
lack of mobi l i ty out of agriculture was a lack o f rural non-farm employment opportunities. Taxes
on labor, regulations requiring high severance payments, social security tax for employers, and
minimum wages made hiring o f workers expensive for rural non-farm employers.
These interactions o f labor and land market restrictions inhibited farm restructuring. Although
farmers lobbied for more farm subsidies, l i t t l e could be done on output markets in light o f trade
and fiscal pol i cy constraints linked to Polands impending accession to the EU. Reforms in factor
markets offered an alternative mechanism for smoothing the economic transition.
Source: Worl d Bank (2001).
8.20 Increasing the marketable ski l l s o f rural labor, though effective and wide-spread
vocational trai ni ng programs woul d spur growth in the non-agricultural r ur al economy and rural
incomes. Gi ven the l ow participation rates o f women in t he labor force, sl ul l s trai ni ng for women
i s especially important: one opti on for increasing womens access t o educational and trai ni ng
institutions i s to reserve more spaces for women.
8.21 Labor regulations (that mai nl y apply onl y t o urban areas) do not directly alter
employment conditions in r ur al areas, but they do have a significant effect in the dynamics o f
employment creation in urban areas and thus influence incentives for rural-urban mi grati on and
rural labor markets. Empl oyment growth in urban areas has been slow, in part because o f an
atmosphere o f mutual hosti l i ty and distrust that typify i ndustri al relations. In particular, the
unusually high degree of discretion over conditions o f employment o f regular workers in specific
establishments hel d by provi nci al authorities i s not conducive t o cooperation between employers
and workers. Replacing the discretion o f authorities on the specific nature o f labor contracts by a
f ew rules on the most common aspects o f these contracts (minimum age, minimum wage,
overtime pay) and the establishment o f procedures t o hel p deal with possible disputes arising
f r om vol untari l y agreed contracts regarding more detailed aspects o f these contracts woul d hel p
build t rust in the industrial rel ati on process, and encourage employers t o create j obs and invest in
human capital.
68 Qureshi, 2003.
81
8.22
children, and t o abolish bonded labor i s needed. Measures to assist households trapped in bonded
labor arrangements, i ncl udi ng legal protection, provi si on o f credit and debt cancellation programs
should be urgentl y considered. Al though these programs often face considerable opposition f r om
power f ul vested interests (box 8.7), such programs coul d have a maj or i mpact on some o f the
poorest r ur al households.
A concerted effort t o enforce existing legislation regarding the rights o f women and
Box 8.7 Bonded Labor and Reforms in Nepal
[n Nepal, government policy reforms in 2000 aimed at raising agricultural wages and ending bonded
labor (Kamaiya) encountered considerable opposition. In January 2000, the Local Self-Governance
Act established a minimum wage for agncultural laborers o f Rs. 74, just over US$1 per 8-hour
workday, Later that year, bonded-labor families filed a petition against their master, an ex-
government minister, demanding minimum wages in compliance wi th the new regulation. These
workers, were being paid the equivalent o f about Rs 14-16 a day in rice, far bel ow the newl y
Zstablished minimum wage.
When the former minister refused, the bonded laborers attempted to register a complaint with the
Chief District Officer. Thereafter followed stri kes and protests by human rights activists and others
in an effort to end the practice o f bonded labor, whi ch culminated with a July 17, 2000 national
government decree declaring the practice of bonded labor to be illegal. An estimated 16,000 to
40,000 bonded laborers (mostly in western Nepal) were declared free o f their ancestral debts. The
decree also mandated a prison sentence o f up to t en years for anyone violating the ban on bonded
labor.
Many landlords strongly resisted these reforms, however. Thousands of liberated Kamaiyas were
driven out o f former homes, and their possessions confiscated by landlords. Many former Kamaiyas
moved to refugee settlement camps in five districts in Western Nepal and have continued to press for
the enforcement o f the minimum agricultural wage; 10 kuttus of land for each displaced former
bonded laborer family; identity cards for former bonded laborers; protection from police and former
landlord harassment; food, health services, and education for people in the temporary settlements.
In response to the needs o f the former bonded labors, the International Labor Organization (ILO)
began a $3.5 mi l l i on project, funded by the U.S. Department of Labor, that provides vocational
training, education, legal and counseling services, mi cro credit, and the establishment o f revolving
savings and credit funds.
Sources: Sushma Joshi, Bonded to Labor: The Contemporary Situation in Nepal, South Asian
Magazine for Action and Reflection (SAMAR) 16: FalUWinter, 2003, (ww~~~.samaniiiarazine.orq).
www.us.ilo.orelarchivelilofocusl200 llwinter
Credit
8.23
n o transport costs, though considerable transactions costs f or small farmers in r ur al formal credit
markets. Nonetheless, formal credit has often been rationed, and access t o credit i s a significant
problem. Approxi matel y 17 percent o f al l r ur al households face credit rati oni ng in bot h the
formal and i nformal sectors, resulting in a 23 percent reducti on in the value o f crop yields.
Credit markets are potentially the most fl exi bl e o f factor markets, i nvol vi ng essentially
8.24
rates for loans in the formal sector) coul d eliminate these policy-induced incentives toward
Removal o f subsidies on credit (i mpl i ci t in the conti nui ng l o w repayment / high default
82
capital-intensive technologies that reduce labor demand. Efforts at promoti ng agricultural
diversification should thus avoi d subsidies on credit that woul d encourage capital-intensive
technologies in production, processing and marketing. Instead, agricultural diversification, the
development o f the rural non-farm sector and poverty reduction may be better achieved through
publ i c investments in electricity, transport and other infrastructure. Further wor k on particular
constraints to r ur al non-farm investment, employment and growth i s needed, however.
8.25 Producti on credit and micro-credit programs targeted to landless and small farmers that
required other forms o f collateral (besides land) coul d also help promote rural employment and
income generation. Rural credit f r om formal sources i s currently available for a narrow range o f
agricultural producti on activities and does not serve the needs o f the non-farm sector. In
particular, avai l abi l i ty o f medium-term credit i s extremely l i mi ted. Adaptations t o conventional
l endi ng products and delivery mechanisms, such as matching disbursement and repayment to
agricultural producti on cycles, reducing costs through use o f appropriate modem technology, and
risk management through portfol i o diversification can hel p make micro-finance f or agricultural
more viable (box 8.8). Increased access to credit by small scale enterprises in rural areas, for
example, woul d promote farm to non-farm linkages, develop the r ur al non-agricultural sector and
increase l abor demand. Targeted matchi ng grants t o poor households for income-generating
activities are one opti on (box 8.9).
8.26
developing micro-finance as part of i t s poverty alleviation strategy. In 2003, Rs. 1,442 mi l l i on
(2.5 % o f total institutional credit) was disbursed as small loans through the Pakistan Poverty
Al l evi ati on Fund (PPAF), Khushal i Bank and the Zarai Taraqiati Bank Li mi t ed (ZTBL, formerl y
called ADBP). Comprehensive analysis o f existing micro-finance programs i s needed t o assess
the effectiveness and financial sustainability o f these programs. Promoti on o f savings
mobi l i zati on schemes and implementation o f an adequate regulatory framework f or deposit-based
institutions coul d hel p provi de sustainable resources for micro-credit.
The Government o f Palustan in recent years has, in fact, placed considerable emphasis on
83
Box 8.8 Mi cro-fi nance f or Agri cul t ure
Mi crof i nance institutions (MFIs) have tended t o avoi d less densely populated or diversified rural
areas, and fi nanci ng o f seasonal or longer-term crop and livestock activities. Conventional mi cr o
credit relies heavi l y on short-term loans with frequent, regular repayments, whi ch does not fit wel l
with seasonal crop producti on or livestock producti on (except f or poultry). Adaptations t o
conventional fi nanci al products and delivery mechanisms can make micro-finance f or apcul t ur e
more viable:
Mat chi ng disbursement and repayment to agricultural production cycles. Fl exi bi l i t y in l oan
disbursement and repayment i s needed, with finance made available when farmers need i t and
repayments matchi ng income f r om produce sales. PRODEM, a rural MFI in Bol i vi a, adopted a
customized repayment scheme f or small farmers, with di f f eri ng repayment schedules even for
members within a solidarity group t o fit harvest calendars. I ndi vi dual agricultural loans were also
introduced, with collateral at a ratio o f 1.5:l t o the l oan amount. PRODEM further mi ni mi zes risk by
restricting f i nal l oan payments to a maxi mum of 60 percent of the l oan amount, and by limiting each
office' s port f ol i o in each economic sector to 30 percent. Agri cul tural l endi ng now accounts f or about
one-fi fth o f PRODEM's l oan portfol i o.
Flexibility in collateral requirements. Land may hol d l i t t l e value as collateral, as land-use rights
may be di f f i cul t t o prove, clients may not own land, l and markets may be weak, or cost o f registering
l and as collateral may be high. Financial service providers therefore need t o be more fl exi bl e in
terms o f the collateral required, even if the value of nomor t gage guarantees i s sometimes more
significant as a repayment incentive than i ts real resale value. Personal guarantees, movable assets,
and group guarantees can al l be adequate alternatives.
Using technology. Technological innovations can increase operational efficiency and l ower costs o f
operating in rural areas, whi l e i mprovi ng financial services available to rural clients. There has been
a tendency t o overestimate the short-term benefits and underestimate the up-front implementation
costs. For example, in India, the Swayam Krishi Sangam's experiment combines smart cards with
hand-held computers to streamline meetings between clients and borrowers in remote areas.
However, this did not produce the dramatic ti me savings expected, and expansion o f the project has
been put on hol d.
Flexible delivery mechanisms. Maki ng use o f existing delivery outlets, rather than investing in
expensive new branch networks, can significantly l ower the cost o f provi di ng financial services, and
can also al l ow a wi der range o f services to be provided. Options include: worki ng with/through rural
post offices, retai l stores, rented offices in schools and hospitals, or shared offices with other
financial institutions. Mobi l e staff can hel p reduce operating costs and i mprove access in more
remote areas.
Risk management techniques. A pri nci pal factor discouraging MFI l endi ng to small farmers i s the
systemic risk inherent in much smallholder agriculture. Most MFIs that have successfully moved
i nt o agricultural l endi ng have used a diversification strategy t o reduce l endi ng risk, bot h in their
port f ol i o and at the household level. Portfol i o di versi fi cati on helps ensure that a l oan port f ol i o be
diversified across sectors and regions/communities, and that repayments do not f al l due at the same
time. This increases the stability o f the port f ol i o and reduces lending risk f r om weather events and
f r om pri ce fluctuations in certain crops. Confianza, a Peruvi an MFI, whi ch developed f r om a purel y
agricultural portfolio, has now set a target percentage for agricultural l endi ng o f 30 percent of i t s
overall portfol i o.
1 Source: World Bank. 2004. Agricultural Investment Sourcebook.
84
Box 8.9 Suggested guidelines for providing matching grants for income-
generating activities
Target matching grant assistance to very poor communities or groups that are beyond the
current reach o f micro-finance institutions. One way to make the grant amount large
enough to be u s e h l to the poorest, but too small to be worthwhile for better of f groups.
IGAs financed must be cost-effective ways o f reducing poverty. This can be demonstrated
by impact and cost-effectiveness indicators.
The investment should not compete directly with private investment (existing or likely).
Beneficiaries should always contribute at least partly in cash (no l ess than 5 YO o f the total
project cost), which will demonstrate commitment and can serve toward the i ni ti al working
capital to operate the activity.
Over generous subsidies may create false positive demand (even where beneficiaries
contribute in form o f labor or cash). This may jeopardize future maintenance o f the
investment by beneficiaries. Subsidies used without tied commitments for repayment, user
fees, or maintenance, may create perverse incentives for greater rent-seeking by
beneficiaries.
Grants should be combined wi t h training and support to establish local savings and credit
associations to capture increased income flows and finance future economic activities
(group or individual) on a sustainable basis.
Subsidies based on percentage cost-sharing o f subprojects creates an unknown contingent
l i abi l i ty for government. This can be avoided by basing these on per capita amounts, or
fi xi ng a ceiling for government contributions with excess being met by beneficiaries.
Source World Bank, Agricultural Sourcebook, 2004a.
Implications for Rural Poverty Reduction
8.27
much of South Asi a over the past four decades. Increased producti on o f ri ce and wheat6 through
adoption o f green revol uti on technology o f i mproved seeds, i rri gati on and fertilizer, di rectl y
raised incomes o f small farmers, l ed t o reductions in the real pri ce o f maj or food staples for
consumers, and spurred employment and increases in real wages through demand f or agricultural
labor, as wel l as demand for labor in the r ur al non-agricultural economy.
Increased agricultural producti on has been a maj or force for reduci ng r ur al poverty over
8.28 Rur al poverty in Pakistan did not decline in the 1990s, however, in spite o f agricultural
growth. Overestimation o f true sectoral growth rates because o f abrupt changes in estimates o f
livestock population i s part o f the explanation for this l ack o f correlation between agricultural
growth and poverty reduction. Stagnation in the real consumer prices o f ri ce and wheat (in
contrast to declines in early decades) i s another maj or factor. Two other maj or factors are the
changing structure o f the Pakistan economy, in particular the decl i ni ng share o f agriculture in
total GDP (39 percent in 1970, but onl y 24 percent in 2000), and the persistent high degree o f
concentration o f l and (and l and revenues) amongst medi um and large farmers. As a result o f
these structural characteristics, growth in agricultural incomes, though they lead t o substantial
mul ti pl i er effects on the rural non-farm economy, has a smaller i mpact on rural incomes (in terms
69 In Pakistan, increased yields o f cotton also contributed to rural income growth, particularly in the 1990s.
85
of the percentage increase in non-agricultural households incomes) than agricultural growth in
Pakistan had in past decades.
8.29
non-agricultural rural households. However, landless agricultural laborers and non-agricultural
rural poor households account for 61 percent o f the rural poor (and nearly 30 percent o f the rural
population). Al though agricultural growth can have a maj or i mpact on a sizeable segment o f the
rural poor through combined direct and multiplier effects, i t i s unl i kel y t o be sufficient t o rapi dl y
raise incomes o f this entire segment o f the rural population. Thus, in the absence o f a change in
the structure o f rural incomes and employment or significant gains in the rural non-farm economy
apart from agricultural growth-induced linkage effects, targeted interventions t o agricultural
laborers and the rural non-farm poor wi l l be needed.
Rur al agricultural growth remains a maj or engine o f growth for bot h agricultural and
8.30
(Worl d Bank, 2003b) recognizes this expl i ci tl y. In addi ti on t o advocating sustained and broad
based economic growth emanating f r om the rural areas the strategy also emphasizes the
simultaneous provi si on o f social and economic services and infrastructure for the poor, creating
j ob opportunities and i mprovi ng governance as essential elements.
The Poverty Reduction Strategy Paper (PRSP) o f Pakistan issued in December 2003
Conclusions
8.3 1 Significant structural changes have taken place in Pakistans economy over the past
several decades that make factor market reforms cri ti cal t o increasing agricultural producti vi ty
and raising incomes o f the rural poor. Rur al popul ati on has steadily increased, gradually reduci ng
average f ar m sizes in the face o f constraints on the overall supply o f arable l and and water. The
size o f the agricultural sector relative to the overall economy has steadily shrunk, as the output o f
the rural non-farm economy has expanded. Rural poverty whi ch declined steadily (as a
percentage o f total rural population) in the 1980s and early 199Os, has increased margi nal l y in
recent years.
8.32 Even in the face o f increasingly severe constraints on l and and water resources, however,
agricultural growth can pl ay a central rol e in increasing r ur al incomes and reduci ng poverty.
Experience o f other countries suggests that factor market reforms, coupled with outward-oriented
trade and exchange rate pol i cy can lead t o rapi d agricultural growth and rural poverty reduction
through diversification o f agricultural producti on i nto high-value products (e.g. f r ui t s and
vegetables) with labor-intensive producti on and processing. Reforms in factor markets that
promote the allocation o f scarce l and and water resources t o their most effi ci ent uses, and
increase ret urns t o unski l l ed labor, are essential f or repl i cati ng this success in Pakistan (see table
8.3).
8.33
sufficient t o significantly raise incomes o f a large fraction o f the r ur al non-farm poor, even with
i t s substantial mul ti pl i er effects on the non-agricultural economy. Policies and programs t o
increase access t o credit and enhance worker and entrepreneurial ski l l s can di rectl y support
growth in the rural non-agricultural economy and further raise incomes o f the r ur al non-farm
poor. Targeted interventions are also needed t o reach the poorest households i ncl udi ng mi cro-
credit, enforcement o f l aws on bonded labor, and trai ni ng in marketable ski l l s. In these ways,
rural factor market pol i cy reforms have the potential t o contribute t o a rapi d reducti on in rural
poverty through increases in bot h agricultural and non-agricultural productivity, as wel l as
through direct interventions at the household level.
Because many r ur al poor households l ack access t o land, agricultural growth alone i s not
b
a2
8
a
9
a a
a a a a
a a
a a a
a,
c,
B
8
8
2
%
x
P
+
.i
Y .i
.3
cd
e
a,
P
x
3 Y
0
a,
,-c
3
0
Y
88
Annex 1 : Credit Access and Agricultural Productivity
A 1 . 1 . This annex examines the link between access to credit and gross farm productivity, as
measured by per acre crop yields. We are not interested here in the relationship between use o f credit
per se and producti vi ty. A farmer who does not take out a l oan i s not necessarily credit rationed; he
may si mpl y not need credit, and consequently may be just as productive as a farmer who does take
out a loan, The hypothesis that we are interested in testing i s whether the i nabi l i ty t o obtain credit (or
enough credit) when desired reduces a farmers producti vi ty vis a vis a farmer who obtains as much
credit as he wants or one who does not want any credit in the f i r st place.
Al . 2.
use. Pakistani farmers typi cal l y borrow at the beginning o f the agricultural season t o finance the three
pri nci pal pl anti ng inputs: seed, fertilizer, and tractor rental. Access to credit can thus ensure that key
inputs are available in sufficient quantity and in a ti mel y fashion. Far m credit i s also used for l ong-
term investments in l and or equipment; the relatively l ong duration o f formal loans suggests that they
are often used f or such purposes. The resulting capital improvements woul d presumably also enhance
agricultural producti vi ty once they are put i nto place. We do not explore the precise channel through
whi ch credit access impacts producti vi ty at this stage, and i t i s unclear whether producti vi ty gains
from l ong-term investment coul d ever be detected in data such as ours.
The mai n channel by whi ch credit i s l i kel y to influence f ar m producti vi ty i s through input
A1 -3.
each pl ot during the kharifand rabi seasons o f 2000-01, along with input use and expenditures. The
advantage o f using pl ot-l evel data i s that one can control for a weal th o f pl ot characteristics, such as
topography, irrigation, and soil-type, that also influence producti vi ty. Credit access, o f course, i s
defined onl y at the l evel o f the household, and for this reason it i s important t o correct the standard
errors for any correlation o f the errors across plots within the same household.
Our unit of analysis here i s the pl ot. We have i nformati on on the value o f crop producti on on
Al . 4.
134 villages, whi ch should capture variation in prices as wel l as in the structure o f factor and credit
markets more generally. We also include a tractor ownership dummy in al l the regressions to al l ow
for the possi bi l i ty o f imperfections in the tractor rental market. In addition, we i ncl ude some
household l evel characteristics that may di rectl y affect producti vi ty such as the education l evel o f the
household head and the number o f adult males in the household (table A1 -1).
In addi ti on t o pl ot characteristics, al l the regressions include dummy variables for each o f the
A1.5. We use four measures o f credit access: (1) the credit access dummy takes the value 1
if a household i s rationed (in either sense) in the formal market and 0 otherwise. (This
corresponds to the 3d specification in table Al.2; (2) the credit access dummy takes the value
1 if a household i s rationed (in either sense) in the i nf ormal market, and 0 otherwise. (This
corresponds to the 3rd specification in table A1.3; (3) the credit access dummy takes the value
1 if a household i s rationed in the formal market but i s not rationed in the i nformal market,
and 0 otherwise. (This corresponds t o the lSf specification in table Al.4; and (4) the credit
access dummy takes the value 1 i f a household i s rationed in both the formal and the i nf ormal
markets, and 0 otherwise. (This corresponds to the 2nd specification in table Al.4). Table
This annex i s taken f r om Jacoby and Mansuri (2004b), Agri cul tural Credi t and Far m Performance: Evi dence
f r om Pakistan.
89
Households
with b
outstanding
Al.5 presents t he OLS regressions for log yi el ds under these four speci fi cati ons
respecti vel y.2
Households Households with
with outstanding loans who face
outstanding no quantity restrictions
loans (139)
(1 80)
Table Al . l List of variables and descriptive statistics
List of variables and descriptive stafistcs
Descvivtion Units of measurament Mean Stand. Deviation Mi n Max
land owned acres 6.09 14.91
dummy for land owners - 0.71 0.46
dummy for tractor owners - 0.08 0.27
highest level of education of adult males members years 5.69 4.98
number of adult males in the household persons 5.17 3.19
household size persons 8.74 4.68
distance from closest bank l=<lkm, 2= 1-2km; 4.10 1.25
number of animals owned (not including poultry) - 2.84 3.57
3=2-5km, 4=5-10km,
5=10-20km, 6=>20h
income from non agricultural stable employment 8.2 28.6
Thousands of Rupees
Figure Al.l Credit Rationinv in the Formal Mar ket
250
1
1
53
21
26
42
6
393.2
~~
In taki ng logs, we drop cases with zero values. Even though we lose observations (about 4 percent) in this
procedure we actually gai n in precision o f the estimates. At the same time, selection bias does not appear t o be
a problem, as otherwise equivalent specifications using al l the data with the dependent variable defi ned as
log(expenditures +I) gi ve very similar results.
90
Figure A1.2 Credit Rationing in the Informal Market
Households with
Households Households with outstanding loans who face
with outstanding loans no credit limits (1019)
Households that are not
current borrowers but are
not access rationed in the
forma[ credit sector (287)
Households that are
not current
Farmers borrowers but are
i n the not access rationed
sample
1590
Households that have
informal loans but face
access rationed quantity restrictions (186)
Households that are
access rationed (98)
Households with no
outstanding loans
u
Specification 3
Al.6.
yields on their plots than their credit-rationed neighbors. The size o f the effect i s roughl y the
same when we l ook at the t wo markets separately. However, as we discuss above,
households can substitute one source o f credit for another-although the t wo sources may not
be perfect substitutes. The third and fourth specifications tackle this question.
The regression resul ts indicate that rationed households realize significantly lower
A1.7.
households who can obtain al l the credit they need f rom i nformal sources. Interestingly, the
productivity effect disappears entirely. This suggests that the impact o f formal sector
rationing i s dampened considerably in rural Pakistan because o f a vibrant i nf ormal market
whi ch absorbs much o f the residual demand f rom the formal market-recall that 75% o f
those rationed in the formal market are able to obtain al l the credit they want in the i nf ormal
market. We turn finally to the remaining 25% o f households who are unable t o get adequate
access t o credit in either market. These households constitute some 10 percent o f farm
households. We find that these households realize yield losses o f 23 percent on their plots as
compared to their non-rationed neighbors.
In specification 3, we examine the impact o f rationing in the f ormal market for
A1.8. One i ssue that we have ignored, so f ar , i s the endogeneity o f credit access. We know
from our analysis in the previous section that access t o credit, especially formal credit, i s
strongly dependent on l and ownership. Access t o credit may also be affected by unmeasured
factors that influence agricultural productivity and input use directly, such as the abi l i ty o f
the farmer or the fertility o f the land. The presence o f such unobservables wi l l render the
OLS estimates in table Al . 5 biased. Moreover, under any reasonable model o f credit
rationing, an unobservable that raises land producti vi ty (such as farmer abi l i ty or soi l
fertility) should also improve access to credit-so the OLS estimates o f the credit access
coefficients are l i kel y t o be biased upwards. We attempt to correct f or this, by using an I V
strategy.
91
Table A1.2 Probit On Access To Formal Credit
Explanato y Variables (I) (2) (3)
L o g Land Owned'
Tractor Owner
I
Hi ghest Level o f Educati on
Number o f Adul t s
Househol d Size
Distance Fr om Bank
Dummy for Stable Income
L o g o f Durabl e Assets
Observations 1574 1574 1574
Absolute value of z statistics in parentheses
* significant at 10%; ** significant at 5% ; *** significant at 1%
'log(acres of land owned + .01)
'log(non ag income+l)
Dependent variable: (1) 1 if some formal credit, 0 if no formal credit;(2) 1 i f not access rationed, 0 if access rationed; (3)
if neither access nor quantity rationed , 0 if rationed access or quantity rationed.
All specifications contain regional dummies. The dummy for Balochistan i s dropped
0.19 0.14 0.12
(0.023)***(0.013)***(0.013)**
0.41 0.52 0.38
(0.148)*** (0.17)*** (0.15)**
lLog of Li vest ock Val ue -0.03 -0.001 -0.00
(0.012)** (0.009) (0.009)
(0.01 1)* (0.008)***(0.008)**
0.02 0.03 0.02
-0.01 -0.03 -0.02
(0.022) (0.18) (0.017)
0.01 0.012 0.011
(0.014) (0.02) (0.02)
0.056 -0.04 -0.08
(0.041) (0.031) (0.03)**
-0.35 -0.043 -0.00
(0.1 14)*** -0.084 -0.005
0.18 0.01 0.02
(.007)** (.005) (.005)
92
L o g Land Owned'
Tractor Owner
L o g o f Li vest ock Val ue
Hi ghest Level o f Educati on
Number of Adults
Househol d Size
Distance Fr om Bank
Dummy f or Stable Income
L o g of Durabl e Assets
Table A1.3 Probit On Access To Informal Credit
Explanatory Variables (1) ' (2) (3)
Observations 1574 1574 ~~
Absolute value of z statistics in parentheses
* significant at 10%; ** significant at 5% ; *** significant at 1%
-.26
(0.0 14)"
-.27
(0.138)*
-.01
-.02
-.02
-.oo
.04
(0.034)
(0.009)**
(0.009)***
(0.019)
(0.012)
-.13
(0.085)***
.003
(.006)***
.o 1
-.02
(0.214)
-.04
(0.0 16)***
.oo
-.03
(0.03)
.oo
.06
(0.049)
-0.09
(0.131)
0.03
(.008)***
(0.020)
(0 .o 12)
(0 .o 1 8)
.02
(0 .O 14)
-.23
-.02
.01
-.03
.01
-.02
(0.03 5)
-.03
0.02
(.006)***
1574
(0.15)
(0 .o 1 O)* *
(0.009)
(0.019)
(0.01)
(0.09 0)
of land owned + .01)
regional dummies. The dummy for Balochistan i s dropped
ependent variable: (1) 1 i f some informal credit, 0 i f no informal credit;(2) 1 if not access rationed in the informal
(3) 1 if neither access nor quantity rationed in the informal market , 0 if rationed accesi
93
Log o f Livestock Value
Highest Level o f Education
Number o f Adults
Household Size
Distance From Bank
Stable Income
Log o f Durable Assets
Table A1.4 Probit On Access To Formal and Informal Credit
Explanatory Variables (1) (2)
Log Land Owned' -.09 -.06
Observations 1574 1574
Absolute value of z statistics in parentheses
* significant at 10%; ** significant at 5% ; *** significant at 1%
'log(acres of land owned + . Ol )
'log(non ag income+ 1)
Balochistan i s dropped
Dependent variable: (1) 1 if rationed in formal but not in informal, 0 otherwise;(2) 1 i f rationed
in formal and in informal, 0 otherwise.
Al l specifications contain regional dummies. The dummy for
3
Tractor Owner
(0.0 13)*** (0.0 17)"""
-.40 -.11
I
(0.1 6 1)* * (0.2 1 7)
-0.01 .03
(0.0009) (0.013)**
-.14 -.02
(0.008)* (0.01 1)
0.02 0.01
(0.018) (0.024)
-0.01 0.01
(0.012) (0.016)
0.05" 0.07
(0.032) (0.042)
-0.06 0.12
(0.083) (0.109)
0.00 -0.0 1
(.005) (-007)
94
Table A1.5 Credit Access and Farm Productivity
Rationed in Rationed in Rationed in Rationed
Credi t Access
Tractor ownershi p
Educati on o f head
No. o f adult mal es
L o g o f pl ot area
L o g value per acre
Pl ot outside vi l l age
Fl at topography
Perennial canal
Non-perennial canal
Good groundwater
Bracki sh groundwater
V.brackish groundwater
Sandy soi l
Maira soi l
Chikni soil
Cotton area
Sugarcane area
Wheat area
Ri ce area
No. Observations
- 0.09 **
(0.04)
0.07
0.01**
(0.006)
0.02""
(0.006)
-0.12***
(0.02)
0.13***
(0.03)
-0.04
0.10*
(0.0 5 8)
0.16**
(0.077)
0.12
-0.05
0.18""
(0.092)
-0.10
-0.05
0.03
0.01
0.49**
(0.197)
0.26
-0.22
-0.1 1
2030 (40%)
r ?
(0.05)
0.07
0.01""
(0.006)
0.02""
(0.006)
-0.12" * *
0.13***
(0.03)
-0.04
0.11*
(0.05 8)
0.17**
(0.077)
0.12
-0.05
0.19**
(0.091)
-0.11
-0.05
0.03
0.01
0.49"" (0.197)
(0.02)
0.28
-0.20
-0.09
2030( 18%)
.J I .57
(0.038)
0.07
0.01**
(0.006)
0.02**
(0.006)
-0.12* * *
(0.02)
0.12***
(0.03)
-0.04
0.11"
(0.059)
0.17**
(0.076)
0.12
-0.05
0.19**
(0.092)
-0.11
-0.05
0.03
0.01
0.48**
(0.198)
0.28
-0.21
-0.10
20 3 0 (3 0%)
(0.074)
0.07
0.01*
(0.006)
0.01**
(0.006)
-0.12* **
(0.02)
0.13***
(0.03)
-0.04
0.11*
(0.058)
0.15*
(0.07 8)
0.10
-0.05
0.19**
(0.091)
-0.10
-0.05
0.04
0.01
0.50**
(0.197)
0.27
-0.2 1
-0.10
2030( 10%)
Adj. R2 .56 .57
r'otes: Standard errors, adjusted for clustering by household, are in parentheses (". **, and *** denote
significance at the 0.1, 0.05, and 0.01 levels, respectively). Al l regressions i ncl ude vi l l age f i xed effects.
Al . 9. The results are reported in table AI .6. We report the results for the two specifications o f mai n
interest. The first and the fourth. Our instrument set includes a number o f variables that capture
household wealth (such as l and holdings, the proporti on o f owned l and for whi ch the household has a
legal title, the value of livestock, and the household's annual expenditures) and demographics
(whether the household has a female head and whether the head was bor n in the village). In principal,
if credit markets function well, household weal th should have n o i mpact on producti vi ty. So one can
reasonably argue that t o the extent that weal th matters it i s due t o imperfections in the credit market.
If such imperfections exist, however, household weal th may also refl ect unobserved differences in
skill or abi l i ty that also i mpact productivity. To control f or this, we i ncl ude the household head's l evel
of education in al l o f our specifications. It i s certainly unl i kel y that any unobserved abi l i ty that i s
reflected in household weal th should not be captured in the household's observed l evel o f education.
As our results in section 4 have already indicated, we are better able t o i denti fy the determinants o f
95
access t o credi t in the formal market. Thus our IV strategy also works better when we l ook at
rati oni ng in the formal market. The F test for excluded instruments i s 26 in the f i r st case, but onl y 5 in
the second. In bot h cases, however our I V estimates have the right si gn and are much larger.
Standard errors also increase in bot h cases-as expected. However, the yield loss for households who
are rationed i s n o w 26 percent and significant at the 95% level.
A1 , l o. Whi l e we do not explore the precise channel through whi ch access to credit raises
producti vi ty in this paper. One such channel may be that it facilitates long-term investments in l and
and equipment. Given the time-to-build for some o f these investments, however, it may be di f f i cul t
t o detect the l ong-run producti vi ty effects o f current credit access status in our data even if they are
important. Nevertheless, to give this hypothesis a fai r test, we re-run the l og yi el d regression
droppi ng al l variables that are potentially investments or might be influenced by past investments; in
particular, the canal and tube wel l i rri gati on variables, the tractor ownership dummy, and the l og per
acre value o f l and. This specification al l ows the credit access variable to pi ck up the full yi el d i mpact
of any recentl y completed agricultural investment. The resulting coefficient on credit access i s
somewhat larger (-.lo in the 1 specification and -.24 in the second) and the SE i s smaller in bot h
cases, This increases the yi el d loss to 11 percent for farmers rationed in the formal market, and t o 26
percent for those rationed in bot h markets. Whi l e this suggests a credit-investment-productivity
channel, i t i s by no means conclusive. A more complete analysis woul d require data o n past
investments al ong with a credit history t o account for the ti me l ag between the taki ng on o f debt and
the compl eti on o f the intended project.
A1 .l 1 . Fi nal l y, gi ven the positive relationship between credit access and l and ownership, i t i s
possible that access t o credit also affects the amount o f l and that households can operate-particularly
if l and leasing markets are functioning reasonably wel l . Specifically, i t i s possible that bigger
landowners have more cash on hand to finance producti on inputs, and therefore can operate more
land, Fi gure Al.3 presents resul ts for a bivariate regression (by province) o f l and operated on l and
owned. Indeed, the results are quite suggestive o f a strong positive relationship between owned and
operated holding^.^ Thus, it i s l i kel y that in addi ti on t o any i mpact o f credit access on per acre l and
producti vi ty, i t may also influence the scale o f farming, whi ch ul ti matel y affects household wealth.
This positive relationship between operated and owned area also hol ds up strongly in a linear regression with
village f i xed effects.
Cr edi t Access
Tractor ownership
Educati on of head
No. of adult males
Log of pl ot area
Log value per acre
Pl ot outside village
Fl at topography
Perennial canal
Non-perennial canal
Good groundwater
Bracki sh groundwater
V.brackish groundwater
Sandy soi l
Maira soi l
Chikni soi l
Cotton area
Sugarcane area
Wheat area
Ri ce area
No. Observations
- 0.26 **
(0.126)
0.05
0.01**
(0.004)
0.02"""
(0.005)
-0.12* * *
0.12"*
(0.03)
-0.03
0.12**
(0.047)
0.16*
(0.085)
0.09
-0.05
0.16"
(0.0 8 5)
-0.08
-0.05
0.02
0.02
0.5 1 ***
(0.167)
0.26*
(0.139)
-0.2 1 *
(0.122)
-0.09
(0.02)
1961 (40%)
96
Table A1.6 Credit Access and Far m Productivity (TV Estimates)
IVEstimates
Rationed in Rationed in
Formal Both
Yield (a) Yield (' )
-0.45
(0.479)
0.06
0.01""
(0.004)
0.01**
(0.005)
- O. l l * * *
(0.02)
0.11"""
(0.03)
-0.04
0.14**
(0.047)
0.16*
(0,091)
0.09
0.15*
-0.05
(0 .o 8 9)
-0.08
-0.06
0.04
0.02
0.52***
(0.167)
0.29**
(0.141)
-0.18
-0.05
1961 (10%)
gtes: Standard errors are in parentheses (*, **, and *** denote significance at the 0.1, 0.05, and 0.01
levels, respectively). Al l regressions include vi l l age f i xed effects.
a) Sig. test o f excluded IVs in f i r st stage credit access equation: F( 6, 1885) = 26.19
b) Sig. t est o f excluded IVs in f i r st stage credit access equation: F( 6, 1885) = 5.2
97
Fipure A1.3 Operated vs. Owned Area by Province
Operated vs. Own
I
I I I I I
0 50 100 150 200
acres owned
I
-.-.-.- Punjab ----. Sind _. _. . NWFP - Balochistan
98
Annex 2: Determinants of Farm Revenue Income in Pakistan4
Revenue Functions for Pakistani Farm Households
A2.1.
agricultural operations i.e. livestock and farmi ng activities; that i s, the focus i s on the net returns t o
household farm-related assets, whi ch include human and physical capital associated with the farm
operations. Household income as defined here i s farm-related income and excludes labor income
f r om of f - f ar m employment as well as pensions and transfers. For landowners, returns may be
generated f r om their own cultivation o f their land, and f r om income derived f r om renti ng or in the
f or m o f share-cropping arrangements. For tenant households (both cash leasing and sharecropping),
i ncome i s generated by their share in the f ar m operation, whi ch yields returns t o thei r on-farm l abor
and capital (off-farm income and remittances are excluded). For landless farm-operating
households, i ncome corresponds to that generated with own cattle and poul try producti on on
common-property and owned non-cultivated land; and that generated by leasing out all o f their
agricultural land.
The emphasis o f this analysis i s on the abi l i ty o f households t o generate net income f r om
A2.2. Net farm-related household income i s defined as gross farm revenues less the cost
o f purchased inputs. To analyze the determinants o f net household income, we make use o f
the restricted revenue function. Algebraically, the gross revenue f rom agricultural
production activity can be represented as using t wo inputs: a short-term f i xed input, z , and
a variable input, x :
The restricted revenue function i s defined as gross revenues l ess purchased (variable) inputs, x :
R(p; z) = R( p; x, z) - wx (2)
Assuming that the household selects the variable inputs to maxi mi ze short-term net revenue, one
can estimate the relationship between observed net revenues and levels o f prices and f i xed inputs.
In the case o f Pakistan, net revenue derives f r om many crops, and we assume that farmers choose
an opti mal combination o f outputs. Crops include f i el d crops (cotton, sugar, wheat and rice), other
crops (including other cash crops, h i t s ) , and l i vestock (whi ch includes poul try and dai ry
revenues). Quasi-fixed inputs consist o f land, canal water, non-land capital, education, own labor,
and agricultural credit.6 To calculate net revenues, we subtract f r om gross revenues the variable
input costs associated with hired labor, seeds, fertilizers (organic and chemical), pesticides,
purchased tube-well water, and machinery and equipment rental; and addsubtract the revenue/cost
o f l and leasing arrangements.
This annex i s taken f r om Gustavo Anri quez and Al bert 0 ValdCs (2004), Determinants o f Far m Revenue in
Pakistan, Background Paper f or t he Pakistan Rur al Factor Markets Study.
An interesting property o f the restricted revenue function(2) i s that i t i s no longer a f unct i on o f the variable
input. Parti al l y differentiating with respect t o x we obtain: at?(p; x, z) I ax = dR( p; x, z) I ax - w = 0 . If the
margi nal retums of the variable input, dR(p; x, z ) / ax, are higher than the cost of acqui ri ng it, then the farmer
wi l l empl oy more o f that input, until the retums o n the last unit empl oyed equalize the cost o f using it, w. As
per a regular revenue function, k ( p ; z ) i s posi ti vel y homogenous o f degree 1, continuous, increasing and
convex in output prices p and i s continuous, increasing and concave in f i xed inputs z.
A more thorough discussion on the possible endogeneity o f quasi-fixed inputs i s gi ven in Appendi x D.
99
A2.3.
because canal water i s ti ed to l and holdings and the market for water i s l i mi ted. Normal l y, farms are
endowed with one canal turn per week per acre o f l and in a rotational system, cal l ed warabandi,
with turns usual l y lasting 20 minutes. These water endowments depend on l and holdings, not crop
area, and are independent of any other demand consideration, such as the type o f crop under
cultivation, terrai n seepage, or seasonality. Farmers make some adjustments by trading their canal
turns t o adjust f or peak crop demand, but these trades usually occur between nei ghbori ng plots.
Sales o f canal t ur ns are uncommon, and in any case not necessarily legal, a fact whi ch may lead to
some underreporting. table A2.1 reports canal water usage and market transactions in the different
districts o f r ur al Pakistan. Except for the districts o f Badin, N. Shah and M.P. Khas, there are very
few market transactions o f canal water.
I t i s i mportant t o note that for Pakistan canal water can be considered a quasi-fixed input,
A2.4.
agricultural season. Because o f the abundance o f share-cropping and l and rental agreements we
purposely differentiate l and owned f r om l and operated. The l and operated includes owned land, as
wel l as l and operated through a fi xed rental or sharecropping agreement. The cost o f usage o f not-
owned operated l and i s discounted for the households. That i s for fi xed rental arrangements we
subtract the cost o f renting land. Whi l e for tenant sharecroppers we account onl y thei r agreed upon
share o f the value of output (revenues); in other words we are i mpl i ci t l y discounting their cost o f
use o f land. The returns to household assets include revenues generated by the households operated
l and use, irrespective o f the lands ownership. The returns to l and specifically are distributed
between the owner and the operator, who coul d be the same agent. Revenues and input costs and
usage are calculated at the operated farm level. For landlords with tenants operated l and excludes
that whi ch i s leased-out, but we include the revenues f r om those lease agreements that i s fixed rent
pai d in cash or in hnd, and the corresponding net value o f output f r om their share-cropping
contracts .
Land operated, once the farm i s in operation, i s a fi xed input in the short term, i.e. the
Table A2.1 Canal Wat er Usage and Transactions by District
District
Faisalabad
Attock
Hafizabad
Vehari
Muzafar Garh
Bahawalpur
B adin
NShah
M.P.Khas
Larkana
Dir
Mardan
Tot al
Source: PlDE 2001
I
Endowed
525
0
24
37
16
16
3 82
65
73
143
0
391
204
,verage Hours
Given or
Received
6.30
0
0.11
0.03
0.04
1.10
19.31
1.78
0.00
8.00
0
2.00
5.19
Y Farm)
Sold or
Purchased
1.99
0
0.03
1.75
0.02
0.04
9.45
25.56
4.57
0
0
0.00
5.52
Surveyed Farms with
Canal Water
56
0
21
52
21
54
80
44
46
6
0
36
416
The degree o f i nvol vement o f the l andl ord in a sharecropping operation varies tkom an absentee l andl ord to
a l andl ord that wi l l make al l the decisions regarding the agricultural operation treating the sharecropper
almost l i ke a wage laborer pai d in kind.
100
Land Ownershi p
A2.5. Agri cul tural land distribution i s notably unequal in rural Pakistan. In the case o f
east and south Asia, the average Gini for operational holdings o f agricultural land ranges
between 0.52 and 0.56. Pakistan has Gini coefficients similar to the highest regional
average, this honor belonging to Lat i n America. Table A2.2 shows the disparity between
the mean and the median of farm sizes (owned and operational), reflecting the skewness o f
the distribution. In the case o f owned land, for example, the mean i s 10.17 acres in contrast
t o the median o f 3 acres. Not surprisingly, the GINI i s high (0.82). Table A2.2 also shows
that l and leasing mitigates the inequality in land ownership, lowering the relative disparity
between the mean and the median, the coefficient o f variability and the GINI index for
operational land holdings.
Mean Median Coefficient of Variability GINI
10.17 3 4.62 0.824
Table A2.2. The distribution of farm size and land ownership (Acres).
1 Leased(0ut) Land 1 1.93 3.71 I 4.40 I 0.894 1
A2.6.
the short term i ncl ude household head education, the household size (a determinant o f own f ami l y
labor allocation) and capital stock. Agri cul tural credit (formal and informal) may be thought o f as a
quasi-fixed input, fi xed within a given year, although adjustable over a longer term. Treating credit
as a separate fixed input serves to measure the margi nal effect on profi tabi l i ty o f the distribution o f
financial funds across farms.
Other important determinants o f household revenue that can be treated as fi xed inputs in
The restricted revenue function we proceed t o estimate may transparently be described by:
R( p; A, X, E, K, W, D; L) = p a F( A, X, E, K, W, D) - C(purchased inputs) + r ( L - A) .
Where F( .) i s the producti on value f r om the farmi ng operation - i ncome f r om farmi ng directly. A i s
l and uti l i zed in the farm operation, r i s the rental rate per acre, L i s total l and owned, and r(L - A) i s
earnings from leasing out or costs f r om leasing in l and used in the farm operation. C(.) represents
the costs of al l purchased variable inputs. The quasi-fixed inputs that determine farm value are: X,
whi ch i s family labor; E i s education, K capital, W i s water, and D i s credit. Costs o f purchased
inputs and producti vi ty coul d vary by district, and dummy variables are included in the estimation
t o account for such differences.
A2.7. The reader should note what income sources are excluded in this measure o f i ncome f r om
farming: off-farm wage and non-farm enterprise i ncome and i ncome f r om pensions, government
transfers and remittances. This woul d affect the interpretation o f the results, specifically the effects
on farm income due t o changes in household labor (reported here in terms o f elasticities). The
estimated marginal effect o f household labor, X, on f ar m i ncome shoul d reflect, in equilibrium, the
opportunity costs o f worki ng o f f the farm, whi ch includes i ncome money earnings net o f
transactions costs (l i kel y non-trivial). This i s in contrast t o the l and operated input in f ar m
production, the (money component) opportunity cost o f whi ch i s i ncl uded expl i ci tl y in t he
expression above; and thus the margi nal effect o f operated l and on f ar m income should be, in
equilibrium, equal t o zero. I f the elasticity o f f ar m i ncome with respect t o l and i s not equal t o zero,
101
this woul d suggest that there i s a sub-optimal use o f the l and input, whi ch woul d be due to some
constraints not incorporated in the analysis.
A2.8. The estimated coefficients for operated land, A, should lead to marginal value
dR dF
product equaling the rental rate, - = 13, + pAxX +etc. = ~ - r = 0, if there are no
dA dA
constraints on land trades, the elasticity o f net revenues with respect to the operational size
of the farm should be equal to zero. In the case o f land owned, L, the marginal effect on
revenues should be equal to the l and rental rate - = pL + pLxX +etc. = r > 0 ; and, i f there
are no non-rental benefi ts or costs to l and ownership not accounted for in the revenue
function and without constraints on land trades, the elasticity should be equal to the rental
dR L rL
income relative to total net revenues - - = - 2 0, positive but l ess than 1. There is,
dL R R
however, a possibility o f a negative elasticity with respect to land owned i f the owner
perceives other benefi ts to owni ng more land, not included in the revenue variable, and
there are constraints on renting out land. Such additional benefi ts might arise f rom
expected l and appreciation, land being a means o f wealth accumulation (savings), easier
credit terms, and non-pecuniary returns to social status. But constraints on land trades
woul d be necessary for the farmer not t o rent out an additional acre o f l and at the rental
rate. Such forgone income could be explained by the perceived risk o f expropriation o f
land, and search costs o f finding trustworthy renters.
dR
dL
ECONOMETRIC SPECIFICATION
A2.9.
specification. This flexible functional f orm does not impose any restriction on the
underlying technology in terms o f elasticity o f substitution, and, in principle, al l theoretical
properties can be tested.8 The underlying restricted revenue function can be approximated
linearly:
To estimate the restricted revenue function, we choose a generalized quadratic
where indexes i andj refer t o output prices p= { 1. f i el d crops, 2. livestock, and 3. other crops} and
indexes k, 1 refer t o quasi fixed inputs Z={ 1. Capital, 2. Education, 3. Household Size, 4. Land, 5.
Water, and 6. Credit}. To reduce the number o f estimated parameters, we use the property o f linear
homogeneity in prices o f the functi on and di vi de by the pri ce of other crops:
* This functional f or m also has the advantage that i t does not make l ogari thmi c transformations that cannot be
applied t o variables with zeros like in our data set.
102
wherepl i s the pri ce o f other crops, and cl and j 2 are pri ce o f field crops di vi ded by price o f
other crops and pri ce o f livestock di vi ded by pri ce o f other crops, r espe~t i vel y. ~ Di stri ct dummies
capture region-specific differences between farms, such as l and ferti l i ty and other unobservable
farm characteristics correlated with district in whi ch the household l i ves. Addi ti onal l y, we include
type-of-tenancy dummies (i.e. owner operated, sharecropping tenant operated, etc.) to test for
tenancy specific differences in revenues. The results are presented in terms o f elasticities.
As an example, consider the elasticity o f the revenue function with respect t o education:
n
where the bar over the variable indicates sample means, and the f i j and Sij are the regression
estimated coefficients o f equation (4). If instead o f sample means we use group means o f the
variable, we can approximate the elasticities f or the different f ar m g r o ~ p s . ' ~
MAIN FINDINGS
A2.10. The detailed results o f estimating equation (4) are presented in table A2.3. In
general, the results are satisfactory, with a reasonable fit (R2 = 66%)." The elasticities of
the revenue function with respect to the quasi-fixed inputs are reported in table A2.4.
Bel ow the results are discussed in t er ms o f i ndi vi dual factors o f production.
HUMAN CAPITAL
A2.11. Using the entire sample, we find that the input with the highest elasticity i s human capital
(education), with a value o f 0.8. l2 This estimate i mpl i es that if the education l evel o f the household
head were t o r i se by 10% then overall net revenues woul d r i se by about 8%. Using the average
education l evel of 6.43 years, another year of education woul d represent an increase o f
approximately 16% in the education level, whi ch woul d translate i nto a 13% increase in net
We assume that pri ce vari abi l i ty i s the result o f exogenous conditions (such as distance t o markets) and not
correlated with f ar m characteristics or product quality.
lo Furthermore, t o test if the elasticity i s si gni fi cantl y di fferent f r om zero, we di vi de the elasticity by i t s
standard error, whi ch i s equal t o the square root of:
k=l i =O j t i
\ i=O i =O k=l
Al l the first order and second order theoretical curvature properties o f a revenue f unct i on are met.
Hamperi ng the preci si on o f the estimates o f returns t o education, and f or that matter the rel i abi l i t y o f the
education figures in Tabl e 1, i s the unsatisfactory l evel o f response t o the question o f education l evel o f the
head of the household in the survey. We opted t o use average education l evel at the district l evel f or these
missing values, whi ch al l ows us t o use these observations, but reduces the rel i abi l i t y o f the resul t s.
103
VARIABLE CO-EFFICIENT
revenues. In terms o f present value, using a 10% discount rate, the benefit o f an additional year o f
education woul d result in an increase in weal th that i s 130% o f yearly revenues. Mor e realistically,
for younger generations, for whi ch the opportunity cost o f one more year o f schooling i s the
foregone returns associated with fami l y labor, this elasticity suggests notably high potential rates o f
returns in farming, perhaps even higher if they migrate t o off-farm employment.
STANDARD ERR OR
104
VARIABLE
Land Owned
Land Operated
Land Operated x Land Operated
CO-EFFICIENT STANDARD ERROR
-6.980 4.664
0.71 9 7.936
0.003 0.039
105
Table A2.4 Elasticities of household farm revenue with respect to Quasi-fixed factors
Capital
Education
Own Labor
Land
(Owned)
Land
(Operated)
Water
Credit
(informal)
Total Sample
0.267"""
(0.104)
0.814"""
(0.23 6)
0.320
(0.206)
(0.131)
0.325""
(0.135)
0.082""
(0.03 6)
(0.080)
-0.214
-0.014
Landless
Workers
0.220"""
(0.0 89)
0.873"
(0.458)
1.200"""
(0.43 0)
-0.247
(0.158)
N/ A
N/A
-0.018""
(0.008)
Small Farms
PO- 4 Acres)
0.133""
(0.05 5)
0.242
(0.225)
0.716"""
(0.23 3)
(0.046)
0.052
(0 .O 5 2)
0,071""
(0.033)
-0.070
-0.036"
(0.021)
Medium
Farms
p4 -20 Acres)
0.345"""
(0.1 39)
1.1 24"" *
(0.331)
0.047
(0.271)
(0.076)
0.373""'
(0.134)
0.077""
(0.03 6)
(0.165)
-0.123
-0.042
Large
Farms
f>20 Acres)
0.268"
(0.151)
0.845" * *
(0.250)
0.204
(0.313)
(0.432)
1.135"""
(0.420)
0.110
(0.2 1 9)
0.204
(0.139)
-0.632
Note: Standard errors in parenthesis. * Impl i es significant at the 10% level, ** implies significant
at the 5% level, and *** i mpl i es significance at the 1% level.
A2.12. But i t i s notable that the elasticity with respect t o education i s much smaller for
small farms (0.2), and greatest for medium sized farms (1.1). This suggests an important
and positive interaction between human capital and operational scale. Constraints t o
enlarging farm size woul d be a bottleneck to i mprovi ng farm-generated incomes vi a
improvements in educational levels, whi ch in turn woul d tend t o reduce the demand by
small farm households for education o f their children. A factor that might counteract the
negative effect o f scale i s the opportunity to make use o f higher education levels in the
generation o f off-farm wages and income f rom non-farm enterprises. Supporting this
possibility i s the much higher elasticity (0.873 in table A2.4) o f revenue with respect t o
education that i s estimated for household with no operational l and (some o f whi ch are
landless).
FARM OPERATION SIZE
A2.13, The elasticity o f operated farm size i s increasing with f ar m size. Because net revenues
account f or the cost o f the use o f l and (and so the expected elasticity with respect to l and in an
efficiently worki ng l and market should be zero) the results suggest a greater deviation f r om the
efficient allocation o f l and in the case o f larger farms. The elasticity of revenues with respect t o
operational size f or small farm i s 0.05, whi l e medi um farms have an elasticity o f 0.37 and large
farms of 1.13. In a wel l -functi oni ng market, a pr i or i one woul d expect that increasing the farmer' s
and sharecropper's operational l and by one acre (by leasing in, not getting an acre free) woul d
increase income by i t s margi nal value product and decrease i ncome by i t s rental rate. It woul d not
affect income di rectl y attributable to farmi ng - because the margi nal product of l and should equal
106
the rental rate. Therefore, the measured elasticity should be zero, and that i s what the elasticity
estimate suggests for small farmers. This i s grati fyi ng result, implying that, on average, smal l
farmers are rati onal l y allocating land, gi ven the levels o f other variable inputs.
A2.14. By contrast, the positive and higher elasticities for medi um and larger farms suggest that
for those farms the marginal benefits f r om scale expansion are higher than the observed margi nal
cost (the rental rate), and those farms should expand. This raises the question o f what might expl ai n
this apparent maladjustment o f l and use in medi um and larger farms, in contrast to the case o f
smaller farms. In a well-functioning l and market, the net revenue elasticity with respect t o l and
shoul d be zero f or al l farm sizes, although this does not imply that rental rates should be the same
across f ar m sizes. If the elasticities are not zero, hypothetically if small farmers are side by side
with larger farmers, the higher elasticity for larger farmers woul d imply an incentive f or larger
farms t o expand, bidding up rental rates and i nduci ng a movement o f l and use f r om the smal l t o the
larger operations.
A2.15. For areas where small and larger farmers are not side by side, the differences in elasticities
by farm size coul d also be due to differences in output mix (and different margi nal revenue curves
with respect t o land) and in the efficiency in the functi oni ng o f l and markets. If small farmers are
concentrated in areas where their smaller size i s more appropriate for the most profi tabl e product
mix for those areas (likely associated with higher per-acre valued crops, for example horticulture,
bei ng produced closer to towns), l and transfers woul d be between small farmers and not between
smal l and larger operations outside those areas. Land markets might be better developed in those
areas where smal l farmers concentrate. Fi nal l y, rental rates might differ between smaller and larger
operations, but this should not be reflected in different elasticities, if markets were functi oni ng t o
set rental rates t o equilibrate across farms the margi nal value product o f land. In fact, average
observed l and rental rates per acre for small farms (1 5,400 rupees) are 2.2 times as great as rental
rates f or medi um farms (4,800 r ~pees) . ' ~ Why might this be so? The concentration o f smal l farms in
areas produci ng high-valued (per-acre) products woul d expl ai n the differences in rental rates, but
not the posi ti ve elasticities for larger farmers. Consistent bot h with large rental rate difference and
with non-zero revenue-land elasticities i s the hypothesis that l and owners set rental rates f or larger
operations bel ow those for smaller farmers, and bel ow the larger renter's short-run margi nal
product. This woul d require a rati oni ng o f total l and rented out at that l ower rate. Land owners
might rati on l and in this way in a similar manner as employers offer so-called effi ci ency wages,
extracting renter l oyal ty and more efficient l and and water use, and reduci ng supervision costs.
Efficiency rental rates woul d also tend to induce a larger pool o f potential renters f r om whi ch t o
select, i ncl udi ng tenants with more worki ng capital.
A2.16. In summary, there are t wo hypothesis (not necessarily exclusive) for these resul ts
regarding operation size: the first i s that small farmers are geographically concentrated in
areas with higher-valued products and well-functioning l and markets; and the second i s that
landlords ration land to medium and large tenants.
LAND OWNERSHIP
A2.17. The marginal effect o f owned l and on household net revenues deri vi ng f r om f ar m
producti on and l and rental (positive for l and owners, negative for renters) appears to be negative
although not statistically significant. This result, whi ch might appear surprising at f i r st gi ven that
the margi nal value product o f owned l and ought t o equal the rental rate, suggests that owni ng l and
(in contrast to the l and input in farm production) has a value that i s not fully accounted by the
l3 For large farms (more than 20 acres) there are very f ew observations o n rental rates.
107
agricultural or rental income i t generates. That i s if l and has a use beyond i t s employment as crop
producti on input (say as an instrument for access to credit and markets, as a store o f wealth, as a
speculative investment, and as a source o f social power), then agricultural revenues woul d not fully
account the returns to land. Landowners woul d perceive a margi nal utility associated with an
additional owned acre that i s greater than the margi nal revenues i t generates in cul ti vati on or in the
rental market. And owners woul d have the incentive to expand ownership size beyond the opti mal
poi nt based onl y on yearly agricultural and rental income.
A2.18. But the possibility o f renting out l and should, in a perfectly worki ng market, offer
constant returns to scale in t er ms o f net revenue generation. Logically, therefore, some
constraints on land rental (in terms o f the optimization o f the farm revenues we are
measuring) must exist for the farmer simply not to rent out an additional acre at the rental
rate. As in the case o f the results for operational size above, these resul ts f or scale o f
ownership suggest some imperfections in the land rental market. The owner might not rent
out due to a perceived risk o f expropriation o f land, and/or t o the search costs o f finding
trustworthy renters. For medium and large f arms, the estimates suggest that tenants woul d
be willing to pay more than the observed rental rate, whi l e land owners woul d be willing to
accept less. Other benefi ts and costs are i nvol ved in the l and market that are not reflected
by the observed rental rate.14
FAMILY SIZE
A2.19. Bot h using al l observations, and in the case o f the specific estimates for medium and large
farms, the effect on household revenue o f fami l y size i s not statistically di fferent f r om zero. To the
extent that fami l y size i s a pr oxy for fami l y labor employed in the farm operation, this result
suggests that own labor i s employed up t o the poi nt where margi nal gross revenue i s zero. But the
reader should note that the absence o f data on the quantities o f f ami l y labor effecti vel y empl oyed in
the farm operation i s a maj or weakness. (Quantities o f hi r ed labor are also unavailable. but the cost
o f hi red labor i s subtracted t o obtain net household revenues). If al l relevant inputs are accounted
f or in the net revenue measure, and if f ami l y size i s a good pr oxy f or fami l y l abor employed in
production, then the result suggests a near-zero opportuni ty cost o f fami l y l abor in medi um and
large farms; but in the case o f small farms the revenue elasticity with respect t o f ami l y size i s
rel ati vel y much higher and significantly different f r om zero, suggesting a non-zero, posi ti ve
opportunity cost of fami l y labor. Mor e l i kel y, however, for medi um and large farms, f ami l y size i s
weakl y correlated with fami l y labor actually employed in production; that i s for smaller farms,
fami l y size i s a better indicator o f household agricultural labor actually applied than f or larger
farms. An increase in the number o f f ami l y members for larger farms i s perhaps directed t o leisure
or t o non-farm-production wor k (either non-farm-production wor k or of f - f ar m work, the revenues
fi-om whi ch are excluded f r om the net revenue mea~ur e) . ' ~
l4 Not e that neither the elasticity o f revenues with respect t o owned l and nor the elasticity with respect t o
operational l and are measuring the margi nal products o f l and in cultivation, as woul d be obtained f r om a
producti on function. Usi ng net revenues at the l evel o f i ndi vi dual plot, another study by the Wor l d Bank
(2002) based on a prel i mi nary version o f the same data set, f ound decreasing returns with respect t o f ar m
operational size.
'' Furthermore, in the case o f these Pakistani data, f ami l y size i s posi t i vel y correlated with weal th and wealth
with f ar m size. The dependency rati o (f ami l y dependents rel ati ve t o f ami l y workers) wi l l l i kel y increase with
fami l y size. T o the extent that f ami l y size i s posi t i vel y correlated with bot h chi l dren and aged grandparents
(and other relatives), there woul d be a l ower correl ati on between f ami l y size and the f ami l y l abor input
effectively employed o n the farm.
108
A2.20. By contrast, in t he case o f smal l f ar ms and l andl ess househol ds, t he estimates o f t he
househol d i ncome el asti ci ty with respect to o f f ami l y si ze labor are posi t i ve and si gni fi cant.
The ef f ect o f family l abor i s par t i cul ar l y high for t he l andl ess group. I t i s highly l i kel y that
such f ami l i es have less oppor t uni t y o f empl oyi ng non- f ami l y l abor and less i ncome to
afford l ei sure. For t he small f ar mer t he posi t i ve el asti ci ty i s also l i kel y r el at ed t o t he
di screte nature o f labor al l ocat i on associated with mi n i ma l requi rements o f family labor t o
even maintain production and with an absence o f a mar ket for smal l amount s o f of f - f ar m
labor.16
SURFACE WATER
A2.21, Turning t o the water input, the revenue elasticity with respect t o surface water i s increasing
with farm size, although the estimates are significant onl y for small and medi um sized farms. There
i s no out-of-pocket expense t o the use o f surface water, and farmers are endowed with a gi ven
number o f canal turns per week, whi ch depends on farm size. Therefore the positive and significant
elasticities f or smal l and medi um size farms can be directly interpreted as refl ecti ng the margi nal
value o f rel axi ng the constraint t o canal water use. This resul t supports the idea that larger farms
face less constraint t o water use; and i t coul d be socially effi ci ent to induce transactions that result
in water transfers from larger farms t o smaller. Mor e developed water markets woul d facilitate such
transactions.
A2.22. Our analysis provides an idea t o the margi nal returns t o assets, but it i s onl y a snapshot in
time, Ali and Byerl ee (2000) analyze the producti vi ty o f assets through ti me with a l ong ti me series
data from the Punjab region. They find that there has been a measurable deterioration bot h in water
and l and resources. Organic matter has been decreasing at 2.3% annual rate, at the same ti me that
sodicity o f the l and has also been increasing. The quality o f water has also been in the decline with
increasing carbonate residuals in tube wel l water. These observations expl ai n their alarming
estimation o f a negative growth o f the producti vi ty o f water. Further evidence i s provi ded by Wor l d
Bank (1997), that estimates that salinity causes a 25% reducti on in the yi el d o f maj or crops, and as
much as 40 to 60% in Sindh. Furthermore, water l oggi ng i s an increasing hindrance t o agricultural
growth in the Indus basin. This study also highlights a deteriorating infrastructure, increasing canal
seepage (decrease in delivery efficiency and resul ts many times in increased water logging), and
reduction in storage capacity due t o sedimentation.
A2.23. What the Ali and Byerlee study suggests i s that the margi nal physi cal product o f water
coul d be l ow and perhaps decl i ni ng over time. This decl i ni ng trend coul d l ower the growth rate of
the sector, although this coul d be parti al l y compensated by increasing other factors or
improvements in crop varieties. But the returns t o these other improvements i s l ower. Under the
current circumstances, o f deteriorating infrastructure and qual i ty o f the resource, the social costs o f
inefficiencies in the use o f surface water are high. The question i s, t o what extent does the absence
o f a worki ng water market and the mismanagement o f the i rri gati on system exacerbate - or even
contribute to create - these inefficiencies?
A2.24. The deterioration in the resource factors can be parti al l y reversed, but this requires publ i c
and private investments, and institutional changes. Fr om the perspective o f the farmer, the creation
of a surface water market, whi ch woul d make the allocation o f the resource more efficient and less
constraining, woul d also create incentives f or on-farm investments. Investments such as
l6 The smal l farm households i mmobi l i t y f or part-time empl oyment of f -f arm coul d be influenced by l ack o f
transport and communi cati on f aci l i t y t o find and travel to part-ti me j obs beyond thei r immediate neighbors.
109
conservation measures, precision l and leveling, zero-tillage, bed furrowing, and i mproved i rri gati on
techniques, coul d al l improve water efficiency.
A2.25. Groundwater markets, on the other hand, whi ch are thought to be monopol i zed by the large
landowners with access to the water tables and the capital t o fund tube wells, are also subject t o
static and inter-temporal inefficiencies. The static i neffi ci ency i s generated by the monopol y power
o f these col or f ul l y labeled waterlords. However, Jacoby et al. (200 1) estimate that the social
losses of these monopolies are rather low. The inter-temporal inefficiencies are due t o the open
access nature of the groundwater resource. Tube well owners onl y consider their pri vate costs in
their decision of extracting groundwater; this decision, however, does not incorporate negative
externalities, such as l oweri ng the water table and thus rai si ng the cost o f extraction t o al l water
users. The increase in the use o f tube-wells wi l l likely contribute to further over-extraction, defined
in terms o f social costs. This i s a probl em that private agents are unl i kel y t o resolve i ndi vi dual l y,
but requires coordination, whi ch in many countries i s provi ded by a government agency t o enforce
conditions f or the expansion o f tube wel l extraction. These institutional issues are discussed in the
chapter on water.
CREDIT
A2.26. In Pakistan, previous authors have noted that smal l farmers have l i mi t ed access t o
i nsti tuti onal credit, rel yi ng on non-institutional sources; larger operations are more favored by
formal credit lenders (Malik, 2003b). Farmers who are poorer and small r el y pr i mar i l y on i nformal
credit markets. As shown in table A2.4, the elasticity with respect to i nformal credit i s
insignificantly different f r om zero for the entire sample and negative (and statistically significant)
f or small farms. The cost o f credit i s not expl i ci tl y accounted for in the net revenue measure, but to
the extent that informal credit costs are reflected in purchased input costs, the l o w elasticity o f
i nformal credit to recipients i mpl i es less significant constraints t o credit use. At the margin, farmers
on average have adjusted i nformal credit use such that the addition t o gross revenues f i om an
increase in i nformal credit i s offset by the addi ti on to variable costs o f purchased inputs; and thus
an increase in i nformal credit woul d produce l i ttl e in terms o f additional net revenues, and one
woul d expect an elasticity o f zero. In the case of smal l farmers, the negative and statistically
significant elasticity may imply over-borrowing, with negative impacts on producti on value, whi ch
i s di ffi cul t t o justify. Or more l i kel y the result i mpl i es an endogeneity in the credit variable, where
ceteris paribus less productive farmers have less access t o formal credit and substitute i nformal
credit. The direction o f causality may run f i om producti on revenues t o borrowi ng in i nformal
markets.
A2.27. In table A2.5 we compare this base result using i nf or mal credit to estimates using bot h
formal credit alone and the sum o f formal and i nformal credit. One should note f i r st that the
estimated elasticities for the other inputs, using the alternative indicators o f credit use, are not
statistically different f r om the base case estimates, whi ch indicates some robustness in the estimated
elasticities. The elasticity with respect to formal credit i s not statistically significant, but using the
total credit available yields a positive and statistically significant elasticity (0.059). I t i s wor t h
noti ng that formal credit i s a larger source o f funding o f agricultural borrowi ng. The insignificance
o f the two estimated elasticities (for the entire sample) o f bot h i nformal credit alone (negative) and
Note, however, that Mei nzen-Di ck (1 996) concludes that her analysis o f farm-level survey data i mpl i es
that, water markets do i mprove the product i vi t y o f agriculture, parti cul arl y f or smal l and medi um farmers,
but pol i ci es that expand tube wel l ownership are l i kel y to provi de greater welfare gains t han those whi ch
encourage groundwater sales f r om tube wells owned by a f ew farmers, (p.2).
110
formal credit alone (positive), and the positive and statistically significant estimate using the sum o f
two sources, suggests that the t wo credit types are substitutes.
A2.28. I t shoul d be emphasized, however, that these results reflect an average for farmers o f al l
sizes, and smaller farmers receive a small share o f formal credit. Small farmers apparently enjoy on
average l i ttl e gai n to a marginal increase in i nformal credit, but i nformal credit i s usual l y more
expensive; so this evidence does not contradict the possibility that small farmers might benefi t f r om
greater access t o formal credit, whi ch i s usually offered at l ower interest rates.
Table A2.5 Return on Credit (Elasticities)
Capital
Education
Own Labor
Land
(Owned)
Land
(Operated)
Water
Credit
Base Case
I n form a1
Credit
0.267"""
(0.104)
0.814"""
(0.23 6)
0.320
(0.206)
(0.131)
0.325""
(0.135)
0.082""
(0.03 6)
(0.080)
-0.214"
-0.014
Formal
Credit
0.198"
(0.105)
0.831 ***
(0.224)
0.271
(0.192)
(0.149)
0.334""
(0.140)
0.091"""
(0.0 3 6)
0.031
(0.046)
-0.290"
Informal andor
Formal Credit
0.207""
(0.105)
0.777"""
(0.2 1 9)
0.247
(0.195)
(0.148)
0.340""
(0.139)
0.095"""
(0.037)
0.059""
(0.026)
-0.282"
Note: Standard errors in parenthesis. * Impl i es significant at the 10% level, ** i mpl i es
significant at the 5% level, and *** i mpl i es significance at the 1% level.
None o f the elasticities are different f r om their base case values at the 10%
significance level.
A2.29. Khandker and Faruqee (2000) show that the returns to lending f r om the Agricultural
Development Bank o f Pakistan ADBP (which accounts for 55% o f formal lending in rural
areas) i s much higher f or smaller farms than for larger farms, but nonetheless lending i s
highly biased towards larger farms. Furthermore, the recovery rate o f loans i s higher for
small farmers than for larger ones. This suggests that the ADBP as o f 1995 (when the
survey used by the authors was implemented) coul d have been more efficient in i t s
targeting o f loans. Private financial institutions, on the other hand, are reluctant t o
participate in rural financial markets. Al though they accrue 30% o f their deposits f r om
rural areas, they onl y allocate 5% o f their lending portfol i o to rural areas.18
Khandker and Faruqee (2002)
18
111
OTHER RESULTS
A2.30. Contrary to what was expected, there are f ew statistically significant interactions between
output prices and factor returns. Perhaps the onl y strong interaction we find i s between the relative
prices o f output and education. An increase in the prices o f f i el d crops and livestock, rel ati ve t o the
pri ce o f other crops, woul d increase the elasticity o f net revenues with respect t o education. A
deeper interpretation of this result in a cross-section analysis i s problematic, because i t depends on
the mix o f other crops, and also coul d be a result o f the di stri buti on o f prices across regions. In
whatever case, this i s a noteworthy deserving more attention in future research. We also find that
the elasticity with respect to capital increases with the pri ce o f f i el d crops and decreases with the
pri ce o f other crops. To the extent that present policies offer protecti on t o field crops relative t o
other crops, farmers have an increased incentive t o invest, most l i kel y in the protected activities.
Fi el d crops are usually more intensive in the use o f physi cal capital.
THE EFFECTS OF TENANCY TYPE
A2.3 1. The coefficients on the dummy variables representing different tenancy types are al l
positive, implying greater revenues due to access t o agricultural l and compared t o those wi thout
operational farml and (some landless). We find, that, control l i ng for f ar m size, education and the
other variables, landlords who are also tenants leasing in, and f i xed rental tenants earn more
revenues than sharecropping tenants, who eam onl y slightly more (6,365 rupees) than those wi thout
operational farmland.g For a small farmer, control l i ng for al l other variables in the revenue
function, simply bei ng a fixed-rent tenant raises per-acre revenues by 35,000 rupees (75% o f an
average smal l farms total farm income, or 49% o f the households total income).
A2.32. But t he di f f er ence bet ween fix-renter i ncome and share-cropper i ncome vari es with
family and farm sizes, and with wat er use. The negat i ve coef f i ci ent s on t he i nt er act i on
vari abl es share-cropper/household-size and share-cropper/operation-size suggest that t he
di f f er ence in r evenue bet ween f i xed renters (or owner-operators) and share-croppers
increases with f ami l i es and farm size. Thus for smal l er f ar ms t he advantage of t he non-
sharecropper wo u l d b e smal l er; t he advantage o f fix r ent s i ncreases with farm size. ( The
reader shoul d not e that t he p-val ues o f t he t wo i nt er act i on coef f i ci ent s are 0.15 for family
si ze and 0.12 f or farm size, hi gher t han t he standard si gni f i cance l evel s o f 5% and lo%.)
The point estimates o f t he coef f i ci ent s associ ated with shar ecr oppi ng also suggest that there
coul d b e suf f i ci ent l y smal l share-cropper family and f ar m sizes that t he share-cropper
i ncome would equal o r even exceed owner-operator or f i xed r ent er i ncome.
A2.33. Does t hi s imply that share-croppi ng i s an i nef f i ci ent contract compar ed t o f i xed
rental ? Possi bl e i nef f i ci enci es associated with share-croppi ng ari se due to t he sub- opt i mal
pr ovi si on o f hi dden or non- cont r act i bl e i nput s (not subj ect to moni t or i ng by t he landlord).
The i ncent i ve to under - pr ovi de var i abl e i nput s arises because t he share-cropper only earns
a fracti on o f t he mar gi nal val ue pr oduct o f t he operati on. Wher e monitoring o f input use by
l andowner s i s effecti ve, one wo u l d not expect under - pr ovi si on. In our st udy possi bl e
hi dden i nput s (non-moni torabl e) are own family labor (measured by f ami l y size) and
l9 The effect on revenues o f being a sharecropper (relative to those without operational farmland) i s
calculated using the average values o f small farms for household size, operational farm size and hours o f
water use, and i s 299.6 + (8.51)*(-27.77) + (2)*(-31.73) + (56)*(0.51) = 13.3 (although not highly statistically
significant). To get the value in Rupees we mul ti pl y by the price o f other crops yielding 13.3* 480 = 6,365
RP *
112
surface water use. We find that this type o f inefficiency exists in the provision o f surface
water as indicated by the positive coefficient on the interaction o f sharecropper dummy
with water. Since the marginal returns o f canal water are greater for sharecropper tenants,
this implies that in reality there i s an effective under-provision of this input. The marginal
product o f an additional unit of surface water is, ceteris paribus, greater for the
sharecropper than for other tenancy types. Increases in farm size and the number o f fami l y
members employed in the farm operation may also increase monitoring costs per farm,
giving incentive to have small operations for sharecropping. (But this may be off-set by
increasing the monitoring costs o f havi ng more operational uni t s t o monitor.)
A2.34. Land leasing arrangements as they prevail in Pakistan apparently do not provide
land tenancy security or a mechanism to foment longer-term investments by the tenant.
Present l and leasing arrangements do not provide incentives to undertake on-farm
investments attached to the land. Such investments might be in soil-improvement, l and
leveling, fixed structures and orchards, and water-saving projects. These are projects that
provide longer-term benefi ts but over whi ch the tenant (sharecropper or fi xed rent) has no
ownership rights. This i s an area where Pakistan coul d examine altemative rental systems,
as for example operate in Europe, where land rentals are common.
113
Appendix 3: Distributional Impacts of Agricultural -- Growth and Factor
Market Reforms
A3.1.
i mprovi ng the allocation o f land, water, labor and capital across agricultural activities. This
increased agricultural output, in hun, increases demand f or inputs i nto agricultural production, as
wel l as demand for processing o f agricultural products (e.g. wheat milling or cotton ginning and
spinning). In addition, as household incomes increase, fi nal demand f or bot h agricultural and
non-agricultural goods and services increases. To the extent that domestic supply i s elastic, the
increased demand can spur growth in producti on and incomes throughout the economy. Ho w
these gains in i ncome are distributed across households i s determined largely, however, by the
ownership and access to factors o f production.
Rur al factor market reforms have the potential to raise agricultural producti vi ty through
A3.2. This appendix presents an analysis o f the impacts o f agricultural growth and
selected factor market reforms on agricultural and non-agricultural growth, and
household incomes in Pakistan using a fixed-price multiplier framework. The data base
for the analysis i s a 2001-02 social accounting matri x ( SAM) , a consistent set o f accounts
o f the economic flows between production activities, earnings o f factors o f production,
incomes o f various types o f households, and demand for goods and services.
THE 2001-02 PAKISTAN S A M
A3.3. The 2001-02 Pakistan S A M includes 34 activities, each produci ng a single commodity,
except for i rri gated wheat and non-irrigated wheat, bot h o f whi ch produce a single commodi ty
(wheat), (Box A3.1). For the twelve agricultural activities, returns to l and and own-fami l y labor
are disaggregated by regi on (Punjab, Sindh, and Other Pakistan) and by size o f f ar m (small (O-
12.5 acre), medi um (12.5-50 acre) and large (50 acre plus) farms (defined according t o operated
area, not l and ownership). Out o f the 27 factors o f producti on that are specified, 23 i nvol ve onl y
agricultural production: 8 types o f agricultural labor, 12 types o f land, and 3 other factors: water,
livestock capital and other agricultural capital.
A3.4.
objective o f constructing the S A M : to better understand the relationship between agricultural
performance and rural income growth in the context o f i mperfect rural factor markets. Fi fteen o f
the nineteen household categories are rural agricultural households, split according t o amount o f
l and cultivated (large farm, small farm, landless) and regi on (Sindh, Punjab and Other Pakistan).
Non-farm households, bot h r ur al and urban, are split i nto poor and non-poor according t o their
2000-01 per capita household expenditures, with poor households defined as those with a per
capita expenditure o f less than 748 rupeeslmonth per capita. By this definition, 23.5 percent o f
the rural population (1 9.8 percent o f total population) are classified as non-farm r ur al poor
households21 and 22.7 percent o f urban households (15.3 percent o f total national population) are
poor.
This detailed treatment o f rural factors and agriculture in the S A M reflects the pri mary
2o This annex i s based on multiplier analysis by Paul Dorosh using a Social Accounting Mat r i x for Pakistan,
documented in Dorosh, Ni azi and Nazl i (2004), A Social Accounting Mat r i x for Pakistan 2001-02:
Methodology and Results, background paper for the Pakistan Rural Factor Markets study.
21 Non-farm rural households are def i ed as rural households f or whi ch the main occupation o f the head o f
household i s not crop or livestock farming.
114
BOX A3.1: STRUCTURE OF THE 2001-02 PAKISTAN S A M
Activities (34)
Agriculture (12): Wheat irrigated*, Wheat non-irrigated*, Ri ce-IRRI*, Rice-basmati*, Cotton*,
Sugarcane*, Ot her maj or crops, Fruits and vegetables, Livestock-cattle/dairy*, Poultry, Forestry, Fi shi ng
Industry (16): Mining*, Vegetable oils*, Wheat milling*, Ri ce milling-IFW*, Ri ce milling-basmati*,
Sugar*, Other food, Cotton lint/yam*, Textiles*, Leather*, Wood products, Chemicals*, Cementhri cks,
Petrol eum refi ni ng*, Other manufacturing*, Energy*
Services (6): Construction, Commerce, Transport, Housing, Private Services, Publ i c services
Commodities (33)
Same as activities with Wheat irrigated and Wheat non-irrigated aggregated as one commodi ty (Wheat).
Factors (27)
Labor (10): Own-farm (Large farm, Medi um f ar m Sindh, Medi um f ar m Punjab, Medi um f ar m Other
Pakistan, Smal l farm Sindh, Smal l farm Punjab, Smal l f ar m Other Pakistan), Agri cul tural wage, Non-
agricultural unskilled, ski l l ed
Land (12): Large farm (Sindh, Punjab, Other Pakistan), Irri gated medi um f ar m (Sindh, Punjab, Other
Pakistan), I rri gat ed smal l farm (Sindh, Punjab, Other Pakistan), Non-i rri gated smal l f ar m (Sindh, Punjab,
Other Pakistan)
Other factors (5): Water, Capital livestock, Capi tal other-agriculture, Capi tal formal, Capi tal i nf ormal
A3.5.
Table (97 sectors), 2001 -02 Nati onal Accounts (value added for 15 sectors), 200 1-02 Pakistan
Integrated Househol d Survey (consumption disaggregation), the 200 1 Pakistan Rural Household
Survey (household income disaggregation), and the 200 1-02 Pakistan Economic Survey
(sector/commodity data on production, prices, trade).22
Data used in construction o f the S A M derive mai nl y f r om the 1990-91 Input-Output
A3.6. Househol d incomes and expenditures relative t o those o f other household groups f ol l ow
similar patterns as in the PRHS and HI ES surveys, though absolute levels o f household incomes
and expenditures are substantially higher gi ven the apparent substantial under-reporting o f
expenditures (particularly on services) and i nformal sector incomes in the surveys.
A3.7. On average, househol d i ncomes in t he S A M are 2.1 t i mes greater than househol d
expendi tures in t he HIES Survey, and rural househol d i ncomes in t he S A M are 1.7 t i mes
greater than rural househol d i ncomes in t he PRHS sur vey (tabl e A3.1). These r at i os var y
by househol d group, however . The S A M cal cul ati ons suggest that expendi tures o f l ar ge
and medi um farmers are seri ousl y understated in t he HIES -by a factor o f 3.8, on
average. Compar ed to total i ncomes in t he PRHS sur vey results, however , factor
i ncomes o f medi um and l ar ge farmers in t he S A M are only 2.8 t i mes hi gher. No t e that
mu c h of t he di f f er ence in i ncomes i s due t o esti mated r et ums to cul t i vat ed land. Fo r only
t wo househol d groups, r ur al non- f ar m poor and rural agr i cul t ur al l abor in Sindh, are t he
S A M househol d i ncomes less than househol d expendi tures in t he HIES.23
~~
22 See Dorosh, Ni azi and Nazl i (2004), A Social Accounti ng Mat r i x f or Pakistan, 2001-02: Met hodol ogy
and Results for details o f the construction o f the SAM.
23 Not e that, because of a l ack of reliable data, the S A M does not contai n househol d transfers recei ved f r om
other households. I ncl udi ng transfer i ncome woul d l i kel y bring the S A M househol d per capita i ncome
115
A3.8.
Pakistan, but 60 percent o f total factor incomes for agricultural households (77 percent
for agricultural households in Sindh), (table A3.2). 91 percent o f agricultural incomes
derive f r om land, water, own-farm labor, or livestock, so that without access t o land or
livestock; earnings from hired labor and (non-livestock) agricultural capital account for
onl y 9 percent o f agricultural incomes.
Agri cul tural factor incomes account for onl y 23 percent o f total factor incomes in
A3.9.
large f ar m owners (table A3.3). Agri cul tural labor accounts for 32 percent o f incomes f or
agricultural wage laborer households, but onl y 9 percent o f incomes o f tenants and 4 percent o f
incomes o f smal l fanners. Overall, agricultural incomes account for an average o f 56 percent o f
estimated incomes of agricultural households in the S A M , compared with 75 percent in the PRHS
(table A3.4). As described above, the higher figures in the S A M arises mai nl y because o f
allocation o f i ncome f r om non-agricultural labor and i nformal capital to rural households.
Land accounts for more than 30 percent o f household incomes, onl y for medi um and
estimates f or these groups t o approximately the same l evel as the HIES household per capita expenditure
estimates.
e;
3
" " 9 1
? I I
00
117
Agric Agric Total Non-Agr Non-Agr Total
Land Capital Labor Agric Capital Labor Other Incom
Table A3.2 Pakistan: factor income shares by household type, 2001/02
Rur Rur Rur Rur
AgHHs AgHHs AgHHs AgHHs
All Rural Other All
HHs HHs Sindh Punjab Pak Pakistan
Labor 0.522 0.298 0.248 0.240 0.190 0.232
Land 0.08 1 0.144 0.242 0.220 0.190 0.2 18
Large Far m Owners (50+ acres)
Medi um Far m Owners (12.5-50)
Smal l Far m Owners ( 42. 5 acres)
Pure Tenants
Agri cul t ural Laborers
Rur al non-f arm non-poor
Rur al non-f arm poor
Ur ban non-poor
Ur ban poor
Rural Subtotal
Urban subtotal
Rural non-agric households
Water 0.003 0.005 0.014 0.009 ----- 0.008
Capi tal 0.394 0.553 0.497 . 0.531 0.620 0.542
Capi tal 0.115 0.205 0.408 0.249 0.379 0.302
Tot al 1 .ooo 1 .ooo 1 .ooo 1 .ooo 1.000 1 .ooo
Of whi ch Li vest k &Ag
0.15 0.10 0.05 1.00
0.27 0.16 0.05 1.00
0.23 0.16 0.06 1.00
0.15 0.20 0.06 1.00
0.27 0.14 0.06 1.00
0.50 0.43 0.07 1.00
0.59 0.30 0.07 1.00
0.11 0.45 0.44 1.00
0.18 0.76 0.06 1.00
0.33 0.24 0.06 1.00
0.23 0.16 0.06 1.00
0.11 0.48 0.41 1.00
Own-Farm&Agri c / Tot al I nc 0.23 1 0.41 1 0.766 0.560 0.652 0.615
Own Far m / Agr i c Income 0.906 0.906 0.890 0.896 0.949 0.905
Source: Pakistan S A M 2001102.
Table A3.3 Disaggregated Factor Income Shares by Household Group, Pakistan 2001/02
0.34 0.36 0.00
0.31 0.21 0.00
0.18 0.32 0.04
0.16 0.35 0.09
0.00 0.21 0.32
0.00 0.00 0.00
0.00 0.05 0.00
0.00 0.00 0.00
0.00 0.00 0.00
0.13 0.20 0.04
0.21 0.29 0.06
0.00 0.00 0.00
0.70
0.52
0.55
0.60
0.53
0.00
0.05
0.00
0.00
0.37
0.56
0.00
Ip.11 Pakistan 0.06 0.09 0.02 0.17 0.21 0.37 0.25 1.04
Source: Pakistan S A M 2001/02.
118
Table A3.4 Pakistan Rural Agricultural Incomes
PRHS PRHS SAM SAM
Agric Inc Agric Inc Agric Inc Agric Inc
Per Capita Share Per Capita Share
(000 Rs) (percent) (000 Rs) (percent)
Medium and Large Farms
Small Farms
Landless Farmers
Rural Agric Workers
Rural Non-Farm Non-Poor
Rural Non-Farm Poor
15.7 83.5 29.9 57.2
6.1 67.9 8.6 54.8
7.2 87.7 5.3 59.7
2.2 53.1 5.5 53.1
0.3 I .9 0.1 0.4
0.2 6.3 0.2 4.5
Total Rural 6.1 69.7 5.6 37.2
Rural Agric Households 7.1 74.8 9.6 55.9
Source: Pakistan S A M 2001/02; Pakistan Rural Household Survey 2001102.
Modeling Framework
A3.10. This analysis of growth linkages in Pakistan uses a variant o f the fixed-price, linear input-
output (IO) model, the semi-input-output (SIO)
A3.11. The most basic input-output models use f i xed coefficients t o simulate inter-industry
producti on and consumption linkages, assuming fi xed prices and perfectly elastic supply in al l
sectors. Gi ven the assumption o f perfectl y elastic supply, any increase in demand leads onl y t o
hi gher output, with no change in price.
A3.12. Total supply in each sector (Z) i s model ed as the sum o f inter-industry input demand (AZ)
and fi nal demand (F), where fi nal demand includes consumption by households ( p Y) and
exogenous sources o f demand such as exports (E). Income (Y) i s related to producti on through a
fi xed value added share (v) in gross commodi ty output (Z).
Z = AZ + F
= AZ + pY +E
= AZ + pVZ + E
(1)
A3.13. In their unconstrained versions, these models assume supply to be perfectly elastic
in al l sectors. Presumed excess capacity in al l sectors o f the economy implies no
investment constraint to increases in output. Instead, total output and incomes are
determined purely by the l evel o f exogenous demand (E) and a set o f behavioral parameters
((3
(2)
z = (I - c y E
24 Thi s presentation of the SI 0 model closely f ol l ows Dor osh and Haggblade (2003), Growt h Linkages,
Pri ce Effects and Income Di st ri but i on in Sub-Saharan Afri ca. Journal o f Af r i can Economies, 12(2).
119
A3.14. Perfectl y elastic supply i s, o f course, an unrealistic assumption in most developing
countries, especially for agriculture, where land, labor, rai nfal l and technology frequently limit
output. Industri al output i s also often constrained by l ack o f capital. By i gnori ng supply
constraints altogether, the unconstrained input-output (IO) models typi cal l y exaggerate the size o f
the inter-sectoral linkages. Comparisons f r om three different rural economies suggest that classic,
unconstrained input-output models overstate agricultural growth multipliers by a factor o f t wo t o
ten (Haggblade, Hammer and Hazell, 1991).
A3.15. To better simulate real -worl d supply rigidities, semi-input-output (SIO) models
disaggregate sectors i nto those whi ch are either supply-constrained (Z,) or perfectl y elastic in
supply (Z,) ( Bel l and Hazell, 1980). In supply-constrained sectors (Z,), f i r ms operate at full
capacity, and output cannot increase wi thout additional capital investment or i ntroducti on o f new,
more producti ve technology. As indicated in equations (3) and (4), the S I 0 model permits output
responses onl y in those sectors with excess capacity (Z,). Perfect substitutability between domestic
and i mportdexports in the supply constrained sectors (Zl) guarantees that prices are fi xed for al l
tradeable goods. Thus, for these models t o produce a reasonable approximation o f reality, the
supply constrained sectors must correspond t o tradeable goods with fi xed domestic supply at the
gi ven fi xed price, and the perfectly elastic sectors must correspond t o non-tradeable goods. In
supply-constrained sectors (Zl), increases in domestic demand merel y reduces net exports (E&
whi ch then become endogenous t o the system.
A3.16. Investment in additional productive capacity or the i ntroducti on o f new technology wi l l
trigger expansion in the producti on o f tradeable goods (Z1) such as agricultural cereals, export crops
and manufactures. Therefore, the key shocks i ni ti ati ng growth are those that release producti on
constraints in these tradeable sectors. Ne w investment in producti ve equipment - induced by
government policies or incentives - will increase producti ve capacity o f tradeable goods. Public
investment in transportation infi-astructure or i rri gati on facilities opens up new regions t o external
markets. Public investments in apcul t ur al research generate new technology that i mprove
producti vi ty o f cereals and other tradeable agricultural products. Equati on 4 provi des the means of
quanti fyi ng how much i mpact these investment shocks will trigger, in the i ni t i al sector as wel l as
throughout the economy.
A3.17. The specification of whi ch sectors are considered elastic in supply i s cruci al to these S I 0
mul ti pl i er estimates. In this Pakistan analysis, the maj or agricultural traded commodities (wheat,
IRRI rice, basmati rice, cotton, and sugar cane) are treated as inelastically supplied in bot h their r aw
and processed forms. Li vestock (cattle and other large animals) i s also model ed as inelastic in
supply, though poul try i s assumed t o be constrained by demand. Most i ndustri al sectors (mining,
vegetable oils, leather, chemicals, petrol eum refi ni ng, other manufacturi ng and energy) are model ed
as inelastic in supply; services are modeled as elastic in supply. (See box A3.1).
120
A3. 18. Parameters for the model are in general, are derived directly f r om the S A M . However,
consumption parameters were adjusted to reflect margi nal household budget shares and savings
rates di fferent f r om the average shares and savings rates reflected in the SAM. *
SIMULATION 1: OUTPUT SHOCKS TO CROP AND LIVESTOCK AGRICULTURE
The f i r st set o f simulations model a 10 percent increase in output o f tradable crops, together
with a 10 percent increase in processing o f these activities.26 as shown in appendix table A3.5, a
simultaneous 10 percent increase in wheat, basmati and irri rice, cotton and sugar cane producti on
and processing, increases incomes o f large and medi um farmers by 7.2 percent, and incomes o f
small owners and tenants by 4.6 percent. Incomes o f agricultural workers r i se by onl y 2.9 percent,
however, as much o f the gain in labor incomes accrue to farm owners and tenants. Gr owt h l i nkage
effects on non-agricultural output result in a 3.3 percent increase in incomes o f the non-farm r ur al
poor and a si mi l ar increase in the incomes o f the non-farm rural non-poor and the urban poor.
A 10 percent increase in the output o f large livestock has an even greater effect, rai si ng
overal l incomes by 4.5 percent (compared t o 3.1 percent for a corresponding increase in output o f
the maj or crops). Due to the distribution o f l i vestock assets, the gains for small farmers and
landless agricultural households are especially large: 9.7 to 10.9 percent. Combi ni ng 10 percent
increases in maj or crops and livestock, raises nati onal incomes by an average o f 7.6 percent, with
gains to the r ur al non-farm poor (8.2 percent) approximately hal f the size o f gains t o f ar m
households and agricultural laborers (13.8 to 14.7 percent). Thus, linkage effects o f agricultural
growth on r ur al non-agricultural incomes are significant, though agricultural growth linkages alone
are not sufficient t o rapi dl y raise rural non-agricultural household incomes.
25 Specifically, margi nal savings rates o f households were raised by 0.10, and margi nal budget shares o f
manufactured goods, transport and private services were changed by 0.10, -0.5 and -0.5, respectively.
26 Since bot h the agricultural producti on and processing activities o f these crops are model ed as inelastic in
supply, i t i s necessary t o exogenously increase bot h activities in the simulation.
122
SIMULATION 2: SHIFT FROM SHARE-CROPPING TO FIXED RENTS
In theory, producti vi ty o f share-croppers i s expected to be l ower than o f owners or those
with fixed-rent tenants, because for some inputs (such as own-labor), share-croppers pay the full
(implicit) cost, but reap onl y a part (generally one-half) o f the benefits in terms of value o f output.
Using data f r om hi es 2001/02, j acoby and mansuri (2004a) find n o significant difference between
producti vi ty o f share-croppers and owners for cul ti vati on o f maj or crops. However, share-croppers
who are not supervised (those who meet with their landlords fewer than ten times in a season t o
discuss a gi ven pl ot) are found t o be 18 percent less productive than land-owners or share-croppers
who are supervised.
Si mul ati on 2 models the effects of a 22 percent (=l/( 1-. 18)) increase in producti vi ty f or
maj or crops as a result o f a hypothetical shift f r om share-cropped t o either fi xed rent or owned land.
Gi ven that 18.8 percent o f l and in Pakistan i s share-cropped (table A3.6), and o f this, an estimated
35 percent o f tenants are not supervised (based on prhs 2001/02 data), the effect on total producti on
of maj or crops i s onl y 1.4 percent2 in the simulation, al l the margi nal increase in returns to l and are
allocated t o share-croppers?* according to their shares o f total share-cropped l and in the hies
2001/02.29 Not e that 39 and 27 percent o f share-cropped area i s farmed by pure tenants in sindh
and Punjab, respectively (table A3.7).
Results are gi ven in table A3.8.30 though the gains on a national l evel are small, the
impacts on tenants are significant. Incomes o f tenants in sindh r i se by 4.0 percent; incomes o f
tenants in Punjab rise by 2.8 and 2.7 percent, respectively. However, even with a significant (and
l i kel y over-optimistic) value-added mul ti pl i er o f 2.5, the i ni ti al shock i s small relative to the size o f
the Pakistan economy, and the mul ti pl i er income gains are spread widely across household groups,
so incomes o f non-farm groups ri se by onl y 0.3 percent at most.
27 (Productivity effect on unsupervised share-cropped land) * (unsupervisedtotal share-cropped land) *
(share-cropped land / total land) = 0.22 * 0.35 * 0.188 = 1.4%.
28 In the case of a shift from share-cropping to fixed rents, t hi s implicitly assumes that the fixed rent in rupee
terms i s set on the basis of the value of production l ess purchased inputs for the land when i t was share-
cropped. Thus, the simulation models an upper-bound on the direct benefits to former share-croppers of the
productivity increase.
29 In the model simulations, this value added i s paid directly to households, bypassing the factor accounts.
30 Note that in this simulation (and the ones that follow), we model a production shock instead of a simple
value added shock, under the assumption that the productivity gain requires an increase in key inputs l i ke
labor and fertilizer.
123
Table A3.6 share of household group area cultivated by tenure status, 2001/02
Source: Authors calculations from HIES 2001/02 data.
Table A3.7 share of area cultivated by tenure status and household group, 2001/02
Source: authors calculations from hi es 2001/02 data.
124
Table A3.8 simulation results: percentage change in household incomes
r-
Increased
Source: Model Simulations.
SIMULATION 3: REMOVAL OF CREDIT CONSTRAINTS
Using PRHS 2001/02 data, Mansuri and Jacoby (2004b) show that farmers that are credit-
rationed have l ower producti vi ty in crop producti on than do non-rationed farmers. Si mul ati on 2
models a relaxation o f the credit constraint for smal l farmers in Pakistan by increasing their crop
output according the econometric estimates o f the producti vi ty effects.
Using the simplifying assumption that onl y smal l farmers are credit constrained, the
magnitude o f the producti vi ty gai n on total output o f maj or crops i s calculated using the estimated
share of small farms that are credit rationed. In estimate 1, the 1 1.1 percent o f farmers that are
constrained in bot h formal and i nformal credit markets have 23 percent l ower yields, suggesting
that total output o f al l small farmers woul d ri se by 3.3 percent in the absence o f credit constraints.
Similar, using the alternate estimate o f a 26 percent decline in yields for farmers who are
constrained in formal credit markets (45.7 percent o f small farmers), output o f smal l farmers woul d
rise by 16.0 percent (table A3.9).
This 16 percent increase in small f ar m output (split across smal l farmers according t o thei r
shares in area o f each crop as reflected in the S A M ) results in moderate gains in average total
incomes for small farmers: 3-4 percent f or smal l f ar m owners and pure tenants in Si ndh and Punjab.
125
Credit Constraint
Formal
and Formal
Informal Only
(1) Share o f f ar m households that are credit rationed
(2) Number o f smal l owner and owner cum tenant farms as % o f total farms
(3) Number o f pure tenant farms as % o f total farms
(4) Number o f smal l farms (al l types) as % o f total farms, (2)+(3)
0.1 0.41
66.6% 66.6%
23.1% 23.1%
89.8% 89.8%
11.1% 45.7%
-0.23 -0.26
(7) Output gai n f r om rel axi ng credit constraint, [ 1/(1+(6)] - 1 29.9% 35.1%
(8) Percentage gain in output o f small farmers f r om rel axi ng credit constraint,
(5 1 * (7) 3.3% 16.0%
(9) Share o f small farmers in total l and value added (major crops) 53.8% 53.8%
(10) % increase in total value added (major crops) 1.8% 8.6%
(5) Percentage of small farms that are credit rationed, (1)/(4)
(6) Impact o f credit rati oni ng on producti vi ty (regression results)
The increase in small farm output results in a bigger percentage gain in incomes f r om large
farmers than smal l farmers in large part because l and rents received account f or a large share o f
i ncome o f large and (especially) medi um farmers (table A3.10). For example, returns t o l and on
smal l farms (mai nl y l and rents) account for 23 percent o f income for medium land-owners in Sindh,
whi l e returns to l and on small farms account for onl y 12 percent o f incomes of owners (and owner
cum tenants) o f small farms.
126
Small Farmer Punjab
Small Farmer OthPak
Landless Farmer Sindh
Landless Farmer Punjab
Landless Farmer OthPak
Table A3.10 Distribution of Estimated Returns to Small Farm Irrigated Land (Major Crops),
2001/02
41,746 34.8% 13.1%
9,676 8.1% 7.7%
4,099 3.4% 9.4%
4,774 4.0% 10.4%
1,365 1.1% 9.1%
All Farmers 119,902 100.0% 12.9%
Large Farmers
Medium Farmers
Small Farmers
Landless Farmers
7,004 5.8% 7.5%
44,134 36.8% 19.5%
58,525 48.8% 11.7%
10,238 8.5% 9.8%
All Farmers 119,9021 100.0% 12.9%
127
Table A3.11: Crop Yields by Location Along Canals (tondhectare)
Ratio
Head Tail Head: Tail
Wheat 2.4 1.7 1.4
IRFU Ri ce 2.9 1.9 1.5
Basmati Ri ce 2.2 1.7 1.3
Sugar Cane 54.7 29 1.9
SIMULATION 4: IMPROVED DISTRIBUTION OF WATER
Excess use o f water by farmers at the head o f canals, and water supply shortages in the
canal i t sel f result in l ower producti vi ty for farmers at the tai l end o f canals. Si mul ati on 3 models
the effects on producti vi ty and incomes o f easing the water constraint by provi di ng more water t o
farm pl ots at the tai l end o f canals. This gain in supply o f water to tai l end farmers coul d be
achieved through better water distribution or increased availability o f water achieved through
measures such as canal lining. In the simulation, this increase in water at the t ai l end i s assumed to
have no effect o n producti vi ty o f farmers at the head end, however.
Detai l ed data on the share o f l and affected by water shortages at the t ai l end o f canals i s
unavailable, but l i mi ted survey evidence (University o f Faisalabad 2003 survey, Z. Hussain, 2003)
suggests that approximately 27 percent o f farmers are located at the tai l end o f canal systems. In
the simulation, producti vi ty o f crop producti on at the tai l end i s increased by 30 t o 90 percent,
based on the producti vi ty differentials between head and tai l farms reported in Table 4.6.31 Tai l end
l and i s assumed to be distributed by farm size in the same proportions as the average di stri buti on in
each regi on (Sindh, Punjab, Other Pakistan).
As shown in table A3.7, large farmers enjoy the largest percentage increase in incomes as a
result o f this producti vi ty gain, with incomes o f large and medi um farmers in Si ndh rising by 15.0
and 9.9 percent, respectively. Incomes o f large and medium farmers in Punjab rise by 10.7 and 8.4
percent, respectively. Small farm owners and pure tenants in these t wo provinces benefi t as well, as
their incomes ri se by 6.1 t o 6.6 percent.
However, in spite o f the significant (and perhaps over-optimistic) gains in output model ed
here, incomes o f agricultural workers in the t wo provinces ri se by onl y 3 -3-3.6 percent and incomes
of the non-farm rural poor ri se by onl y 3.3 percent. Thus, in spite o f a 14 percent increase in the
value o f producti on o f maj or crops and large GDP multipliers, the gains t o the poorest r ur al
household groups (agricultural workers and non-farm r ur al poor) are rel ati vel y small.
31 Cotton production o f tai l end farmers i s increased by 50 percent (the arithmetic average o f the
producti vi ty differentials in Appendi x Table 3.10).
128
Table A3.12: Simulation Results: Household Incomes
I I I I I I
3.541
I 34851 0.331 2.31 I
lTota'
Shares of total income gains (percent)
a In bi l l i on rupees.
Source: Model simulations
129
Conclusions
Because o f data uncertainties and simplifying assumptions used, the above analysis o f the
effects of increases in agricultural output on incomes in Pakistan agriculture illustrates onl y the
broad order o f magnitude o f the effects. Moreover, these simulations show onl y the static results
of factor market changes, not dynamic effects o f i mproved incentives on private investments and
market development. Nonetheless, the broad structure o f rural production, di stri buti on o f l and and
other factors o f production, and structure o f household incomes are reflected in the analysis.
Two broad conclusions emerge. First, the l evel and distribution o f the benefits of removal
of factor market distortions depend cruci al l y on the magnitude o f the induced producti vi ty shock
and the ownership of the assets involved. In spite o f mul ti pl i er effects, reforms related t o share-
croppi ng are l i kel y to have onl y small overall impacts on rural incomes in aggregate in the short
run, though the benefits to tenants coul d be significant. Credit market reforms and improvements in
water avai l abi l i ty have potentially larger effects on the overall rural economy. Second, the linkage
effects o f expansion in traditional crop agriculture, though important, may not be adequate t o
substantially raise incomes o f agricultural laborers and the rural non-farm poor who l ack significant
capital resources. Thus, in the absence o f a change in the structure o f rural incomes and
employment or significant gains in the rural non-farm economy apart f r om agricultural growth-
induced l i nkage effects, targeted interventions to agricultural laborers and the rural non-farm poor
wi l l l i kel y be needed to rapi dl y reduce the poverty o f these groups.
130
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BACKGROUND PAPERS FOR THE PAKISTAN RURAL FACTOR MARKET
STUDY
Ahmad, Munir. 2003, Agri cul tural Product Markets in Palustan.
Al taf, Zafar. 2004. Li vestock Sector Development: Constraints and Opportunities.
Anriquez, Gustavo and Al bert0 Valdes. 2004. An Analysis o f the Determinants o f Far m Revenue
in Pakistan.
Dorosh, Paul, Muhammad Khan Ni azi and Hi na Nazl i . 2004. A Social Accounti ng Mat r i x for
Palustan, 200 1-02: Methodol ogy and Results.
Cox-Edwards, Alejandra. 2004. Labor Markets in Rur al Pakistan.
Hussain, Zaki r. 2003. Rural Water Markets in Pakistan: Institutions and Constraints.
Jacoby, Hanan G. and Ghazala Mansuri . 2004. The (In)-Efficiency o f Share-Tenancy Revisited:
Evidence f r om Pakistan.
Kemal , A.R. 2003. Agri cul tural Gr owt h and Rural Poverty in Pakistan: A Regional Analysis.
Mal i k, Sohail. 2003. Rural Credit Markets in Pakistan: Institutions and Constraints.
Mal i k, Sohail. 2004. A Not e on Sources of Income and Poverty Dynami cs in Rural Pakistan.
Nazl i , Hi na. 2003. Rural Labor Markets in Pakistan: Insti tuti on and Constraints.
Qureshi, Safraz. 2003. Pakistan Rural Factor Markets Study: Rur al Land Markets in Pakistan:
Institutions and Constraints.